Initial investment Basic calculation Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an installed cost of $20,000; it was being depreciated under MACRS using a 5-year recovery period. (See Table 4.2 on page 117 for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,000 and requires $5,000 in installation costs; it will be depreciated using a 5-year recovery period under MACRS. The existing machine can currently be sold for $25,000 without incurring any removal or cleanup costs. The firm is subject to a 40% tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine.

Answer the following (showing calculation work or excel):

Installed cost of new asset =

Cost of new asset

+Installation Costs

Total installed cost (depreciable value)

After-tax proceeds from sale of old asset =

Proceeds from sale of old asset

+Tax on sale of old asset

Total after-tax proceeds - old asset

Initial investment

Book value of existing machine =

Recaptured depreciation =

Capital gain =

Tax on recaptured depreciation =

Tax on capital gain =

Total tax =