Unformatted text preview: ng capital. Assume a
40% tax rate on ordinary income and capital gains.
a. Calculate the book value of the existing computer system.
b. Calculate the after-tax proceeds of its sale for $200,000.
c. Calculate the initial investment associated with the replacement project. LG4 8–12 Initial investment—Basic calculation Cushing Corporation is considering the
purchase of a new grading machine to replace the existing one. The existing
machine was purchased 3 years ago at an installed cost of $20,000; it was being
depreciated under MACRS using a 5-year recovery period. (See Table 3.2 on
page 100 for the applicable depreciation percentages.) The existing machine is
expected to have a usable life of at least 5 more years. The new machine costs
$35,000 and requires $5,000 in installation costs; it will be depreciated using a
5-year recovery period under MACRS. The existing machine can currently be
sold for $25,000 without incurring any removal or cleanup costs. The firm pays
40% taxes on both...
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