Project 2
Harris Dance Company, Inc., 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.
The firm pays 40 percent taxes on ordinary income and capital gains.
Project 2 Questions:
1) Calculate the book value of the existing asset being replaced.
2) Calculate the tax effect from the sale of the existing asset.
3) Calculate the initial investment required for the new asset.
4) Calculate the incremental earnings before depreciation and taxes for 5 years.
5) Calculate the incremental depreciation for six years.
6) Summarize the incremental after-tax cash flow (relevant cash flows) for years t = 0 through t = 6.
7) With the given information, compute the payback period.
8) ) With the given information in and 15 percent cost of capital,
(a) Compute the net present value.
(b) Should the project be accepted?
Extracted text: Earnings before Depreciation and Taxes Proposed Machine $170,000 Existing Machine Year 1 $160,000 Year 1 150,000 170,000 3 140,000 3 170,000 4 140,000 4 170,000 5 140,000 5 170,000
Extracted text: Facts Existing Machine Cost = $100,000 Purchased 2 years ago Proposed Machine Cost = $150,000 Installation = $20,000 Depreciation-the MACRS 5-year recovery schedule will be used Depreciation using MACRS over a 5-year recover schedule Current market value = $105,000 Five year usable life remaining Five year usable life expected