Reference no: EM133105108

Question - The Stuart Gates & Fences Corporation is considering replacing the metal cutting machine (cutter) it currently uses to cut metal to make fences. The metal cutter has 6 years of remaining life. If kept, the metal cutter will have depreciation expenses of $800 for five years and $700 for the sixth year. Its current book value is $5,000 and it can be sold on ebay for $6,500 at this time. If the old metal cutter is not replaced, it can be sold for $1,000 at the end of its useful life. Stuart Co. is considering purchasing the Fast Cutter XL, a higher-end metal cutter, which costs $15,000 and has an estimated useful life of 6 years with an estimated salvage value of $2,000. This metal cutter falls into the MACRS 5-year class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new cutter is faster and allows for an output expansion, so sales would rise by $2,500 per year; the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $3,000, but accounts payable would simultaneously increase by $1,000. Stuart's marginal federal-plus-state tax rate is 25%, and its WACC is 12%. What is the net (incremental) depreciation amount in year 6?