Unformatted text preview: n be applied
against ordinary operating income. The decisions are also structured to ensure that the usable life remaining on the
old asset is just equal to the life of the new asset; this assumption enables us to avoid the problem of unequal lives,
which is discussed in Chapter 10. 370 PART 3 Long-Term Investment Decisions EXAMPLE Powell Corporation, a large, diversified manufacturer of aircraft components, is
trying to determine the initial investment required to replace an old machine with
a new, more sophisticated model. The machine’s purchase price is $380,000, and
an additional $20,000 will be necessary to install it. It will be depreciated under
MACRS using a 5-year recovery period. The present (old) machine was purchased 3 years ago at a cost of $240,000 and was being depreciated under
MACRS using a 5-year recovery period. The firm has found a buyer willing to
pay $280,000 for the present machine and to remove it at the buyer’s expense.
The firm expects that a $35,000 increase in current assets and an $18,000
increase in current liabilities will accompany the replacement; these changes will
result in a $17,000 ($...
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