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%. 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 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%. a. Calculate the initial investment (show your work) b. Prepare a depreciation schedule for both the proposed and the present machine. Both machines are depreciated under MACRS using a five-year recovery period, but remember, the present machine has only three years of depreciation remaining. c. Calculate the operating cash flows for Damon Corporation for both the proposed and the present machine. Show your work.
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
Earnings before
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 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%.
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