Question

Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $318,000. The system can be sold today for $204,000. It is being depreciated using MACRS and a 5-year recovery period (see the table ). A new computer system will cost $498,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains. a. Calculate the book value of the existing computer system. b. Calculate the after-tax proceeds of its sale for $204,000. c. Calculate the initial investment associated with the replacement project. Data Table a. The remaining book value is $ (Round to the nearest dollar.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 5 years 7 years 33% 20% 14% 45% 32% 25% 15% 19% 18% 7% 12% 12% 10 years 10% 18% 14% 600 VOULAWN 6% 4% Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention Print Done

Answer 1

Book value is the value of the product post depreciation. It is mentioned that computers fall under the category of 5 year depreciation.

As the computer is being sold after 2 years,

Depreciation for first year = 20% of 318000 = 63600

Depreciation for second year = 32% of 318000 = 101760

Book value = Actual Cost - Depreciation = 318000 - 63600 - 101760 = 152640