Janelle Melina & Daniel Jonathan Company, 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. Existing Machine: Cost = $100,000 Purchased 2 years ago Depreciation using MACRS over a 5-year recovery schedule Current market value = $105,000 Five year usable life remaining Proposed Machine: Cost = $150,000 Installation cost = $20,000 Depreciation using MACRS over a 5-year recovery schedule will be used Five year usable life expected Earnings before Depreciation and Taxes: Existing Machine: Year 1 = 160,000 Year 2 = 150,000 Year 3 = 140,000 Year 4 = 140,000 Year 5 = 140,000 Proposed Machine: Year 1 = 170,000 Year 2 = 170,000 Year 3 = 170,000 Year 4 = 170,000 Year 5 = 170,000 There is no change in net working capital. The firm pays 40 percent taxes on ordinary income and capital gains.

Question:

1. Calculate the book value of the existing asset being replaced. (See Table Data)

2. Calculate the capital gain, recaptured depreciation, and tax effect (tax liability/tax benefit) from the sale of the existing asset. (See Table Data)

3. Calculate the initial investment required for the new asset. (See Table Data)

4. Calculate the incremental earnings before depreciation and taxes. (See Table Data)

5. Calculate the incremental depreciation. (See Table Data)

6. Summarize the incremental after-tax cash flow (relevant cash flows) for years t = 0 through t = 5. (See Table Data)