Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is con
ID: 2708240 • Letter: D
Question
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine.
Existing Machine
Cost = $100,000
Purchased 2 years ago
Depreciation using MACRS over 5-year recovery schedule
Current market value = $105,000
Five year usable life remaining
Proposed Machine
Cost = $150,000
Installaion = $20,000
Depreciation - the MACRS a 5-year recovery schedule will be used
Five year usable life expected
Earnings before Depreciation and Taxes
Existing Machine
Year
1 $160,000
2 $150,000
3 $140,000
4 $140,000
5 $140,000
Proposed Machine
1 $170,000
2 $170,000
3 $170,000
4 $170,000
5 $170,000
The firm pays 40% taxes on ordinary income and capital gains
CALCULATE THE INITIAL INVESTMENT REQUIRED FOR THE NEW ASSET
Please show all work and steps to the solution. Thank you!
Explanation / Answer
Initial investment for the new machi ne= cost of machine +installation cost
= 150000+20000=170000
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