The Robinson Corporation, a manufacturer of mobile phone cases, is considering r
ID: 2806593 • Letter: T
Question
The Robinson Corporation, a manufacturer of mobile phone cases, is considering replacing an existing
piece of equipment with a more sophisticated machine. The following information is given.
Facts
Existing Machine ----------------------------------------------Proposed Machine
Cost = $200,000 -------------------------------------------------Cost = $250,000
Purchased 2 years ago -----------------------------------------Installation = $25,000
Depreciation using MACRS over a 5-year ------------------Depreciation using MACRS over a 5-year
recover schedule ----------------------------------------------------recover schedule will be used
Current market value = $210,000
Five year usable life remaining -----------------------------------Five year usable life expected
5 year depreciation percentages: 20, 32, 19, 12, 12, 5.
Earnings before Depreciation and Taxes
Existing Machine -------------------------------------Proposed Machine
Year 1 $250,000 -----------------------------------------Year 1 $200,000
-------2 180,000 --------------------------------------------------2 200,000
-------3 150,000 --------------------------------------------------3 200,000
-------4 150,000 --------------------------------------------------4 200,000
-------5 150,000 --------------------------------------------------5 200,000
The firm pays 40 percent taxes on ordinary income and capital gains.
Given the information in the table above, compute the initial investment.
The -- marks are used as seperators
Explanation / Answer
Calculation of initial investment:
Sale proceeds of existing machine: 210000
Less WDV of existing machine: 108800
200000×(1-0.2)(1-0.32)
Capital gains= 101200
Tax on capital gains= 101200×0.4= 40480
Cash flow= 210000-40480= 169520
Cost of new machine= $ 250000
Add Installation: 25000
Less : cash flow from
Existing machine. 169520
Initial investment= $ 105480
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