Accounts & Finance

"Let's break down the problem step by step:

a. Calculate the book value of the existing computer system:

Given that it's being depreciated using MACRS and a five-year recovery period, we'll use the MACRS depreciation table. According to MACRS, the depreciation rates for a five-year recovery period are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76% for years 1 through 6 respectively.

Year 1: $325,000 * 20.00% = $65,000

Year 2: $325,000 * 32.00% = $104,000

Year 3: $325,000 * 19.20% = $62,400

So, the book value after two years is $325,000 - $65,000 - $104,000 - $62,400 = $93,600.

b. Calculate the after-tax proceeds of its sale for $200,000:

The gain or loss on the sale of the existing computer system is the selling price minus the book value.

Gain/Loss = $200,000 - $93,600 = $106,400

Since the system is being sold at a loss, there is no tax on the sale. Hence, the after-tax proceeds are equal to the sale price: $200,000.

c. Calculate the initial cash flow associated with the replacement project:

The initial cash flow is the cost of the new system minus the after-tax proceeds of selling the old system.

Cost of new system = $500,000

Initial cash flow = $500,000 - $200,000 = $300,000

So, the initial cash flow associated with the replacement project is $300,000."