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
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 terminal cash flow associated with the project.
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