Principles of Managerial Finance

CHAPTER 8 Capital Budgeting Cash Flows 385

LG5

LG5

LG4

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

$11,000.

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.

8–14 Calculating initial investment DuPree Coffee Roasters, Inc., wishes to expand

and modernize its facilities. The installed cost of a proposed computer-controlled

automatic-feed roaster will be $130,000. The firm has a chance to sell its 4-year-

old roaster for $35,000. The existing roaster originally cost $60,000 and was

being depreciated using MACRS and a 7-year recovery period (see Table 3.2

on page 100). DuPree pays taxes at a rate of 40% on ordinary income and capi-

tal gains.

a. What is the book value of the existing roaster?

b. Calculate the after-tax proceeds of the sale of the existing roaster.

c. Calculate the change in net working capital using the following figures:

d. Calculate the initial investment associated with the proposed new roaster.

8–15 Depreciation A firm is evaluating the acquisition of an asset that costs

$64,000 and requires $4,000 in installation costs. If the firm depreciates the

asset under MACRS, using a 5-year recovery period (see Table 3.2 on page 100

for the applicable depreciation percentages), determine the depreciation charge

for each year.

8–16 Incremental operating cash inflows A firm is considering renewing its equip-

ment to meet increased demand for its product. The cost of equipment modifica-

tions is $1.9 million plus $100,000 in installation costs. The firm will depreciate

the equipment modifications under MACRS, using a 5-year recovery period. (See

Table 3.2 on page 100 for the applicable depreciation percentages.) Additional

sales revenue from the renewal should amount to $1.2 million per year, and

additional operating expenses and other costs (excluding depreciation) will

Anticipated Changes

in Current Assets

and Current Liabilities

Accruals $20,000

Inventory 50,000

Accounts payable 40,000

Accounts receivable 70,000

Cash 0

Notes payable 15,000