Question
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
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 Proposed Machine
_________________________________________________________________
Cost = $100,000 Cost = $150,000
Purchased 2 years ago Installation = $20,000
Depreciation using MACRS over Depreciation??the MACRS
a 5?year recover schedule 5?year recovery schedule will be used.
Current market value = $105,000
Five year usable life remaining Five year usable life expected
Earnings Before Depreciation and Taxes
Existing Machine Proposed Machine
________________________________________________________________
Year 1 $160,000 Year 1 $170,000
2 150,000 2 170,000
3 140,000 3 170,000
4 140,000 4 170,000
5 140,000 5 170,000
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 15 percent cost of capital,
a. compute the net present value.
b. Should the project be accepted?
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