Table 11.3
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
-The book value of the existing asset is ________. (See Table 11.3)

Question

Quizplus · Accepted Answer

The book value of the existing asset is calculated by subtracting the accumulated depreciation from the original cost. Given that the asset was originally $25,000 and has been depreciated over three years using the MACRS five-year schedule, we need to calculate the total depreciation over these three years. Without the specific MACRS percentages provided, we can't calculate the exact depreciation amount here. However, the correct approach involves applying the relevant MACRS percentages for the first three years to the original cost and then subtracting this total depreciation from the original cost. The choice provided suggests an understanding of this process, leading to the book value of $7,250, which implies the specific depreciation amounts and percentages are known or provided in the context of the question.

Table 11.3 Cuda Marine Engines, Inc. Must Develop the Relevant Cash Flows