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1. Alysias Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine.
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- Alysias Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.
| Project Information | |
| Existing Machine | Proposed Machine |
| Cost = $100,000 | Cost = $150,000 |
| Purchased 2 years ago | Installation = $20,000 |
| Depreciated with MACRS 5 year schedule | Depreciated with MACRS 5 year schedule |
| Current market value = $105,000 |
|
The firm pays 40% taxes on ordinary income and capital gains. The old machine will have no market (salvage) value after five more years of use. The new machine can be sold for $40,000 after five years of use. There is no change in working capital required for the project. Calculate the following:
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- The initial investment
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- The after-tax incremental cash flows
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- The terminal value (cash flows)
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- The NPV and MIRR if the companys WACC is 9.4%. Should they replace the old machine?
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