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 present 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 proposed 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 depreciation, interest, and taxes (EBDIT) for the present machine are expected to be $95,000 for each of the successive 5 years. For the proposed machine, the expected EBDIT 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 40%. (Table 4.2 on page 117 contains the applicable MACRS depreciation percentages.) Damon expects to be able to liquidate the proposed machine at the end of its 5-year usable life for $24,000 (after paying removal and cleanup costs). The present machine is expected to net $8,000 upon liquidation at the end of the same period. Damon expects to recover its net working capital investment upon termination of the project. The firm is subject to a tax rate of 40%. TO DO Create a spreadsheet similar to Tables 11.1, 11.5, 11.7, and 11.9 to answer the following: Create a spreadsheet to calculate the initial investment. Create a spreadsheet to prepare a depreciation schedule for both the proposed and the present machine. Both machines are depreciated under MACRS using a 5-year recovery period. Remember, the present machine has only 3 years of depreciation remaining. Create a spreadsheet to calculate the operating cash inflows for Damon Corporation for both the proposed and the present machine. Create a spreadsheet to calculate the terminal cash flow associated with the project.
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 present 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 proposed 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 depreciation, interest, and taxes (EBDIT) for the present machine are expected to be $95,000 for each of the successive 5 years.
For the proposed machine, the expected EBDIT 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 40%. (Table 4.2 on page 117 contains the applicable MACRS depreciation percentages.)
Damon expects to be able to liquidate the proposed machine at the end of its 5-year usable life for $24,000 (after paying removal and cleanup costs).
The present machine is expected to net $8,000 upon liquidation at the end of the same period. Damon expects to recover its net working capital investment upon termination of the project. The firm is subject to a tax rate of 40%.
TO DO Create a spreadsheet similar to Tables 11.1, 11.5, 11.7, and 11.9 to answer the following:
- Create a spreadsheet to calculate the initial investment.
- Create a spreadsheet to prepare a depreciation schedule for both the proposed and the present machine. Both machines are depreciated under MACRS using a 5-year recovery period. Remember, the present machine has only 3 years of depreciation remaining.
- Create a spreadsheet to calculate the operating
cash inflows for Damon Corporation for both the proposed and the present machine. - Create a spreadsheet to calculate the terminal cash flow associated with the project.
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