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Degnan 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.

Existing Machine Proposed Machine
Cost $100,000 Cost $150,000
Purchased 2 yrs ago Installation $20,000
Depreciation using MACRS Depreciation using MACRS
ovr 5 yrs rcvr schedule 5 yr recovery schedule used
Current Mkt value $150,000
5 yr usable life remaining 5 yr usable life expected

Earnings before Depreciation and Taxes
Existing Machine Proposed Machine
Year 1 $160,000 $170,000
Year 2 $150,000 $170,000
Year 3 $140,000 $170,000
Year 4 $140,000 $170,000
Year 5 $140,000 $170,000

The firm pays 40 percent taxes on ordinary income and capital gains.

A. Given the information in Table 1, compute the initial investment.

B. Given the information in Table 1, compute the incremental annual cash flows.

C. Given the information from Table 1, assuming 13% rate of return, what is Degnan Dance Company's Inc. NPV on the proposed machine.

Solution Summary

The solution explains how to calculate the cash flows for the project and make the accept/reject decision.