Damon Corporation, a sports equipment manufacturer, has a machine currently in use that was originally purchased 3 years ago for $120,000. The firm depreciates the machine under MACRS using a 5-year recovery period. Once removal and cleanup costs are taken into consideration, the expected net selling price for the present machine will be $70,000. Damon can buy a new machine for a net price of $160,000 (including installation costs of $15,000). The proposed machine will be depreciated under MACRS using a 5-year recovery period. If the firm acquires the new machineits working capital needs will change: Accounts receivable will increase $15,000, inventory will increase $19,000, and accounts payable will increase $16,000. Earnings before depreciation, interest, and taxes (EBDIT) for the present machine are expected to be $95,000 for each of the successive 5 years. For the proposed machine, the expected EBDIT for each of the next 5 years are $105,000, $110,000, $120,000, $120,000, and $120,000, respectively. The corporate tax rate (T) for the firm is 21%. (Table 4.2 on page 120 contains the applicable MACRS depreciation percentages.) Damon expects to be able to liquidate the proposed machine at the end of its 5-year usable life for $24,000 (after paying removal and cleanup costs). The present machine is expected to net $8,000 upon liquidation at the end of same period. Damon expects to recover its net working capital investment upon termination of the project. The firm is subject to a tax rate of 21%.

MACRS 5-year Table 4.2 ( New Machine) Recovery year Percentage recovery 1 20% $32,000 2 32% $51,200 3 19% $30,400 4 12% $19,200 5 12% $19,200 6 5% $8,000

spreadsheet to calculate the initial investment.

dassume a discount rate of 4%.

apply your techniques (NPV, IRR, PI, EVA, Payback) and see if the company should go forward with this project.

What if thediscountrate is 3%, or 5%, would that change your decision?

What is the minimum OCF for this to be breakeven on an economic (NPV) basis (assuming OCF to be the same amount for the next five years).

What if expected OCF is 15% more than expected?15% less than expected?