A new tire balancing machine is available to replace an existing one. The new one will cost $5,092. The old one originally cost $2,594 and was being depreciated over its 3-year life using MACRS. Two years have passed since the old one was purchased. Shipping of the new machine will cost $320. Assume a 40% tax rate. What is the net initial cash flow? Assume the old machine cannot be sold. (Round answer to nearest dollar.) MACRS Depreciation Rates
$$\begin{array} { | c | c | r | }
\hline \text { Year } & \text { 3-Year } & \text { 5-Year } \
\hline 1 & 33.33 \% & 20.00 \% \
\hline 2 & 44.45 \% & 32.00 \% \
\hline
\end{array}$$

Question

A new tire balancing machine is available to replace an existing one. The new one will cost $5,092. The old one originally cost $2,594 and was being depreciated over its 3-year life using MACRS. Two years have passed since the old one was purchased. Shipping of the new machine will cost $320. Assume a 40% tax rate. What is the net initial cash flow? Assume the old machine cannot be sold. (Round answer to nearest dollar.) MACRS Depreciation Rates
$$\begin{array} { | c | c | r | } 
\hline \text { Year } & \text { 3-Year } & \text { 5-Year } \
\hline 1 & 33.33 \% & 20.00 \% \
\hline 2 & 44.45 \% & 32.00 \% \
\hline
\end{array}$$

Quizplus · Accepted Answer

The net initial cash flow is calculated as the cost of the new machine plus shipping, minus the tax shield from the remaining book value of the old machine. The old machine's book value after two years is $2,594 - ($2,594 * 33.33% + $2,594 * 44.45%) = $2,594 - $2,594 = $0. The new machine costs $5,092 + $320 = $5,412. Since the old machine cannot be sold, there is no cash inflow from its sale. Therefore, the net initial cash flow is -$5,412.

A New Tire Balancing Machine Is Available to Replace an Existing