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 incremental depreciation expense for year 5 is ________. (See Table 11.3)

Question

Quizplus · Accepted Answer

The incremental depreciation expense for year 5 can be calculated by first determining the depreciation expense for the new equipment in year 5 and then subtracting the depreciation expense of the old equipment in year 5, if any. Since the new equipment costs $50,000 plus $3,000 for installation, totaling $53,000, and is depreciated over a five-year MACRS schedule, we need to apply the year 5 MACRS percentage to this amount. Without the specific MACRS percentages provided in the question, we typically use the standard five-year MACRS percentages, which for year 5 is often around 11.52%. However, since the exact percentage and the calculation method to arrive at the answer are not detailed in the question, we rely on the provided answer choices to infer the correct calculation. The old equipment, having been depreciated over three years already, would have a minimal or no depreciation expense in year 5, depending on the specifics of the MACRS schedule applied. Therefore, the correct answer involves calculating or knowing the year 5 depreciation for the new equipment and adjusting for any remaining depreciation on the old equipment, which is not explicitly detailed here. Given the choices, the correct answer is inferred based on the information provided and the typical structure of MACRS depreciation schedules.

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