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 120 for the applicable depreciation percentages, which I included below.) 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

Table 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

Percentage by recovery year

Recovery year 3 years 5 years 7 years 10 years

Year 1 - 33%, 20%, 14%. 10%

Year 2 - 45%, 32%, 25%, 18%

Year 3 -15%, 19%, 18%, 14%

Year 4- 7%, 12%, 12%, 12%

Year 5- 12% (5year) 9% (7 years) 9% (10years)

Year 6 - 5% (5year) 9%(7year) 8%(10year)

Year 7 - 9% (7year) 7%(10year)

Year 8 - 4% (7year) 6%(10year)

Year 9 - 6%(10year)

Year 10 - 6%(10year)

Year 11 - 4%(10year)

Totals 100% 100% 100% 100%

a. These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance depreciation using the half-year convention.