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A firm is considering the purchase of a new machine to replace the current machine and has the following information: The new machine: costs $75.000 and requires 55.000 in installation costs. will be depreciated under MACRS using a 5 year recovery period. The old machine: was purchased 4 years ago for an installed cost of $50.000, was being depreciated under MARS using a 5 year recovery period. can be sold today for $55.000 net of any removal or deanup costs. As a result of the proposed replacement firm's investment in net working capital is expected to increase by 515,000 The firm pays taxes at a rate of 40 percent on both ordinary income and capital gains. Percentage by recovery year Recovery3 years 5 7 years 10 years years 3396 1209 1496 year 1 1096 2 145 32 25 118 B 15 119 18 14 4 77 12 12 12 12 9 15 To 8 Totals 100% 100% 100% 100% 1-Calculate the book value of the old machine tool. Total depreciation percentage 10 K 0.1) Accumulated depreciation Book value 2.Determine the taxes, if any, attributable to the sale of the old machine tool. taxes 3. Find the initial investment associated with the proposed equipment Installed cost of new equipment: Cost of new equipment Installation cost Total installed cost-New After tax proceeds from sale of old: Proceeds from sale of old equipment Cost of new equipment Installation cost Total installed cost-New After tax proceeds from sale of old: Proceeds from sale of old equipment Taxes on sale old equipment Total after tax proceeds-old Change in net working capital Initial Investment

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