Question
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
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%.
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%.
Original purchase price 3 years ago $120,000
Net selling price of the existing machine $70,000
Cost of new machine (including installation costs) $160,000
Installation costs $15,000
Salvage value of new machine (after 5 years) $24,000
Salvage value of existing machine (after 5 years) $8,000
Changes to working capital
Increase in accounts receivable $15,000
Increase in inventory $19,000
Increase in accounts payable $16,000
EBDIT per year for the present machine next 5 years $95,000
EBDIT for the proposed machine for next five years:
Year 1 $105,000
Year 2 $110,000
Year 3 $120,000
Year 4 $120,000
Year 5 $120,000
Tax 21%
Depreciation MACRS 5 year recovery
Year | Recovery
1 20%
2 32%
3 19%
4 12
5 12
6 5%
Given the data above please answer the following questions:
- What is the depreciation for year 1 of the old machine.
- What is the depreciation for year 2 of the old machine.
- What is the depreciation for year 3 of the old machine.
- what is the total accumulated depreciation of the old machine
- what is the book value of the old machine at the end of year3
- what is the recaptured depreciation
- what is the tax in the recaptured deprecation
- what is the change in current assets
- what is the change in working capital
- what is the cost of the new machine
- what is the installed cost of the new machine
- what is the total aftertax proceeds from sale of the old machine
- what is the initial cash flow
- what is the depreciation of the new machine
- what is the depreciation schedule of the old machine
- what is the total depreciation of the old machine
- 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
- what are the earnings before interest and taxes for years 1:5
- what are the taxes for years 1:5 of the new machine
- what are the taxes for years 1:5 of the old machine
- what is the net operating profits after taxes 1:5 of the new machine
- what is the depreciation expense with the proposed machine for the years 1:5 of the new machine
- what is the periodic cash flows for years 1:5 of the old machine
- calculate the net gain of the new machine.
- calculate the tax on gain of the new machine.
- calculate the total after-tax proceeds of the new machine.
- calculate the net gain of the old machine.
- calculate the tax on gain of the old machine
- calculate the total after-tax proceeds of the old machine.
- calculate the terminal cash flow.
b. Create a spreadsheet to prepare a depreciation schedule tor both the proposed and the present machine. Both machines are depreciated under MACRS using a five-year recovery period. Remember that the present machine has only three years of depreciation remaining. Denreciation Schedule With Pmnosed Machine c. Create a spreadsheet to calculate the periodic cash flows for Damon Corporation for both the proposed and the present machine. d. Create a spreadsheet to calculate the terminal cash flow associated with the project. After-tax proceeds from sale of proposed machine Proceeds from sale of proposed machine Book value as of end of year 5 Net gain Tax on gain Total after-tax proceeds - proposed After-tax proceeds from sale of present machine Proceeds from sale of present machine Book value as of end of year 5 Net gain Tax on gain Total after-tax proceeds - present Change in net working capital Terminal Cash Flow
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