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 machine, its working capitalneeds 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 40%. (Table4.2on page120contains 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 the 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 40%.

To Do

Create a spreadsheet similar toTables11.1,11.5,11.7, and11.9to answer the following:

1. Create a spreadsheet to calculate theinitial investment.
2. Create a spreadsheet to prepare adepreciation schedulefor both the proposed and the present machine. Both machines are depreciated under MACRS using a 5-year recovery period. Remember that the present machine has only 3 years of depreciation remaining.
3. Create a spreadsheet to calculate theoperating cash flowsfor Damon Corporation for both the proposed and the present machine.
4. Create a spreadsheet to calculate theterminal cash flowassociated with the project.