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 the next five years are $105,000, $110,000, $120,000, $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 epected 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 to answer the
following:
a. Create a spreadsheet to calculate
the initial investment.
b. Create a spreadsheet to prepare
the depreciation schedule for both the proposed 5-year recovery period.
Remember, the present machine has only 3 years of depreciation remaining.
c. Create a spreadsheet to calculate
the operating cash inflows for Damon Corporation for both the proposed and the
present machine.
d. Create a spreadsheet to calculate
the terminal cash flow associated with the project.
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