You are considering replacing an existing computer system which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated using a MACRS 5 year recover period (20%, 32%, 19%, 12%, 12%, and 5%). A new computer system will cost $500,000 including all installation costs. Replacement of the system would not involve any changes in working capital. Assume a 40% tax rate.
a. Calculate the book value of the old computer system.
b. Calculate the after-tax proceeds from its sale for $200,000.
c. Calculate the initial investment associated with the replacement computer.