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 old 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 new machine will be depreciated under MACRS, using a 5-year recovery period. If the firm acquires the new machine, its 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 interest, taxes, depreciation, and amortization (EBITDA) for the old machine are expected to be $95,000 for each of the successive 5 years. For the new machine, the expected EBITDA 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 contains the applicable MACRS depreciation percentages.) Damon expects to liquidate the new machine after 5 years for $24,000. The old machine should net $8,000 upon liquidation at the end of the same period, when Damon expects to recover its net working capital investment. The firm is subject to a tax rate of 21%.

1. What is the depreciation for year 1 of the old machine.
2. What is the depreciation for year 2 of the old machine.
3. What is the depreciation for year 3 of the old machine.
4. what is the total accumulated depreciation of the old machine
5. what is the book value of the old machine at the end of year3
6. what is the recaptured depreciation
7. what is the tax in the recaptured deprecation
8. what is the change in current assets
9. what is the change in working capital
10. what is the cost of the new machine
11. what is the installed cost of the new machine
12. what is the total aftertax proceeds from sale of the old machine
13. what is the initial cash flow
14. what is the depreciation of the new machine
15. what is the depreciation schedule of the old machine
16. what is the total depreciation of the old machine
17. the earnings before deprecation interest and taxes with the proposed machine for the year are 1:5 are shown - the depreciation expense with the proposed machine for the years 1:5 are shown
18. what are the earnings before interest and taxes for years 1:5
19. what are the taxes for years 1:5 of the new machine
20. what are the taxes for years 1:5 of the old machine
21. what is the net operating profits after taxes 1:5 of the new machine
22. what is the depreciation expense with the proposed machine for the years 1:5 of the new machine
23. what is the periodic cash flows for years 1:5 of the old machine
24. calculate the net gain of the new machine.
25. calculate the tax on gain of the new machine.
26. calculate the total after-tax proceeds of the new machine.
27. calculate the net gain of the old machine.
28. calculate the tax on gain of the old machine
29. calculate the total after-tax proceeds of the old machine.
30. calculate the terminal cash flow.

Solution Original purchase price 3 years ago Net selling price of the existing machine Cost of new machine (including installation costs) Installation costs Salvage value of new machine (after 5 years) Salvage value of existing machine (after 5 years) Changes to working capital: Increase in accounts receivable Increase in inventory Increase in accounts payable EBDIT per year for the present machine next 5 years EBDIT for the proposed machine for next five years: Year 1 Year 2 Year 3 Year 4 Year 5 Tax \begin{tabular}{|lr|} \hline $ & 120,000 \\ \hline $ & 70,000 \\ \hline $ & 160,000 \\ \hline $ & 15,000 \\ \hline $ & 24,000 \\ \hline $ & 8,000 \\ \hline \end{tabular} \begin{tabular}{|lr|} \hline $ & 15,000 \\ \hline $ & 19,000 \\ \hline $ & 16,000 \\ \hline $ & 95,000 \\ \hline \end{tabular} \begin{tabular}{|lr|} \hline $ & 105,000 \\ \hline $ & 110,000 \\ \hline $ & 120,000 \\ \hline $ & 120,000 \\ \hline $ & 120,000 \\ \hline & 21% \\ \hline \end{tabular} Depreciation MACRS 5-year recovery \begin{tabular}{|c|r|} \hline Year & Recovery \\ \hline 1 & 20% \\ \hline 2 & 32% \\ \hline 3 & 19% \\ \hline 4 & 12% \\ \hline 5 & 12% \\ \hline 6 & 5% \\ \hline \end{tabular} are depreciated under MACRS using a 5-year recovery period. Remember that the present machine has only 3 years of depreciation remaining. Depreciation Schedule With Proposed Machine c. Create a spreadsheet to calculate the periodic cash flows for Damon Corporation for both the proposed and the present machine. Solution Original purchase price 3 years ago Net selling price of the existing machine Cost of new machine (including installation costs) Installation costs Salvage value of new machine (after 5 years) Salvage value of existing machine (after 5 years) Changes to working capital: Increase in accounts receivable Increase in inventory Increase in accounts payable EBDIT per year for the present machine next 5 years EBDIT for the proposed machine for next five years: Year 1 Year 2 Year 3 Year 4 Year 5 Tax \begin{tabular}{|lr|} \hline $ & 120,000 \\ \hline $ & 70,000 \\ \hline $ & 160,000 \\ \hline $ & 15,000 \\ \hline $ & 24,000 \\ \hline $ & 8,000 \\ \hline \end{tabular} \begin{tabular}{|lr|} \hline $ & 15,000 \\ \hline $ & 19,000 \\ \hline $ & 16,000 \\ \hline $ & 95,000 \\ \hline \end{tabular} \begin{tabular}{|lr|} \hline $ & 105,000 \\ \hline $ & 110,000 \\ \hline $ & 120,000 \\ \hline $ & 120,000 \\ \hline $ & 120,000 \\ \hline & 21% \\ \hline \end{tabular} Depreciation MACRS 5-year recovery \begin{tabular}{|c|r|} \hline Year & Recovery \\ \hline 1 & 20% \\ \hline 2 & 32% \\ \hline 3 & 19% \\ \hline 4 & 12% \\ \hline 5 & 12% \\ \hline 6 & 5% \\ \hline \end{tabular} are depreciated under MACRS using a 5-year recovery period. Remember that the present machine has only 3 years of depreciation remaining. Depreciation Schedule With Proposed Machine c. Create a spreadsheet to calculate the periodic cash flows for Damon Corporation for both the proposed and the present machine