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

Facts

Existing Machine

• Cost = $100,000
• Purchased 2 years ago
• Depreciation using MACRS over a 5-year recover schedule.
• Current market Value: $105,000.
• 5-year usable life remaining.

Proposed Machine

• Cost = $150,000
• Installation = $20,000
• Depreciation the MACRS 5-year recovery schedule will be used.
• 5-year usable life expected.

Earnings before Depreciation and Taxes

Existing machine Proposed Machine

Year 1 $160,000 $170,000

Year 2 $150,000 $170,000

Year 3 $140,000 $170,000

Year 4 $140,000 $170,000

Year 5 $140,000 $170,000

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

Using the following table:

1. Summarize the incremental after-tax cash flow (relevant cash flows) for years t = 0 through t = 5.
2. Compute the incremental annual cash flows.
3. Compute the initial investment. = $170,000 ?
4. Calculate the incremental depreciation.
5. Calculate the incremental earnings before depreciation and taxes.
6. Calculate the tax effect from the sale of the existing asset.
7. Calculate the book value of the existing asset being replaced. = $48,000 ?