Problem
A small manufacturer is considering an equipment replacement project. The new equipment would have an installed cost of $125,000 and would replace existing equipment that was purchased 3 years ago at an installed cost of $80,000. If the company moves forward with the replacement, it could sell the old equipment for $25,000. Purchasing the new equipment would result in the company's current assets increasing by $12,000 and current liabilities increasing $9,000. The company uses the 5 year MACRS table for depreciation and is taxed at 21%
I. What is the accumulated depreciation of the old equipment?
II. What is the current book value of the old equipment?
III. What is the amount of depreciation recapture/recovery?
IV. What is the tax on the sale of the old equipment?
V. What are the after-tax proceeds from the sale of the old equipment?
VI. What is the change in Net Working Capital?
VII. What is the initial investment for the project?