Deegan Dance Company, Inc., a manufacturer of exercise equipment, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.

Facts

Existing Machine Proposed Machine

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Cost = $200,000 Cost = $250,000

Purchased 2 years ago Installation = $20,000

Depreciation using MACRS over Depreciationthe MACRS

a 5year recover schedule 5year recovery schedule will be used.

Current market value = $205,000

Five year usable life remaining Five year usable life expected

Earnings before Depreciation and Taxes

Existing Machine Proposed Machine

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Year 1 $320,000 Year 1 $350,000

2 300,000 2 350,000

3 280,000 3 350,000

4 260,000 4 300,000

5 200,000 5 250,000

The firm pays 40 percent taxes on ordinary income and capital gains.

1. Given the information above, compute the initial investment of the proposed machine.

2. Given the information in above, compute the incremental annual cash flows.

3. Given the information in above and 10 percent cost of capital,

a.Compute the net present value.

b.Compute the payback

c.Compute the IRR

b. Should the project be accepted?