Existing piece of machinery with a more sophisticated

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Unformatted text preview: hine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $55,000 without incurring any removal or cleanup costs. The firm pays a tax rate of 40% on both ordinary income and capital gains. The revenues and expenses (excluding depreciation) associated with the new and the old machine for the next 5 years are given in the table below. (Table 3.2 on page 100 contains the applicable MACRS depreciation percentages.) CHAPTER 8 New machine Year Revenue Capital Budgeting Cash Flows 389 Old machine Expenses (excl. depr.) Revenue Expenses (excl. depr.) 1 $750,000 $720,000 $674,000 $660,000 2 750,000 720,000 676,000 660,000 3 750,000 720,000 680,000 660,000 4 750,000 720,000 678,000 660,000 5 750,000 720,000 674,000 660,000 a. Calculate the initial investment associated with replacement of the old machine by the new one. b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) c. Depict on a time line the relevant cash flows found in parts a and b associated with the proposed replacement decision. LG4 LG5 LG6 8–24 Integrative—D...
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