Unformatted text preview: ordinary income and capital gains. Calculate the initial
investment associated with the proposed purchase of a new grading machine. LG4 8–13 Initial investment at various sale prices Edwards Manufacturing Company is
considering replacing one machine with another. The old machine was pur- CHAPTER 8 Capital Budgeting Cash Flows 385 chased 3 years ago for an installed cost of $10,000. The firm is depreciating the
machine under MACRS, using a 5-year recovery period. (See Table 3.2 on page
100 for the applicable depreciation percentages.) The new machine costs
$24,000 and requires $2,000 in installation costs. The firm is subject to a 40%
tax rate on both ordinary income and capital gains. In each of the following
cases, calculate the initial investment for the replacement.
a. Edwards Manufacturing Company (EMC) sells the old machine for
b. EMC sells the old machine for $7,000.
c. EMC sells the old machine for $2,900.
d. EMC sells the old machine for $1,500.
LG4 8–14 Calculating initial investment DuPree Coffee Roasters, Inc., wishes to...
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