Deegan Dance Company, Inc., a manufacturer of exercise equipment, is considering
ID: 2743585 • Letter: D
Question
Deegan Dance Company, Inc., a manufacturer of exercise equipment, 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. Given the information above, compute the initial investment of the proposed machine. Given the information in above, compute the incremental annual cash flows. Given the information in above and 10 percent cost of capital. Compute the net present value. Compute the payback. Compute the IRR. Should the project be accepted?Explanation / Answer
Answer
Answer 2
Figures in $
New Machine
Existing machine
year
Initial Cost
MACR Depreciation rate
Depreciation
Initial Cost
MACR Depreciation rate
Depreciation
Incremental Depreciation
Incremental Depreciation Tax Benefit
A
B
C
D
E
F
G
A*B
D*E
C-F
G*Tax rate
1
270000
20%
54000
200000
19.20%
38400
15600
6240
2
270000
32%
86400
200000
11.52%
23040
63360
25344
3
270000
19.20%
51840
200000
11.52%
23040
28800
11520
4
270000
11.52%
31104
200000
5.76%
11520
19584
7833.6
5
270000
11.52%
31104
31104
12441.6
Figures in $
Year
Earnings before depreciation and taxes (New machine)
Earnings before depreciation and taxes (Existing machine)
Incremental Earnings before depreciation and taxes
Incremental Earnings before depreciation after taxes
Incremental Depreciation Tax Benefit
Incremental cost of new machine over current market value of old machine
Incremental Cash flow
A
B
C
D
E
F
A-B
C*(1-tax rate)
As per above table
D+E+F
0
-65000
-65000
1
350000
320000
30000
18000
6240
24240
2
350000
300000
50000
30000
25344
55344
3
350000
280000
70000
42000
11520
53520
4
300000
260000
40000
24000
7833.6
31833.6
5
250000
200000
50000
30000
12441.6
42441.6
Figures in $
New Machine
Existing machine
year
Initial Cost
MACR Depreciation rate
Depreciation
Initial Cost
MACR Depreciation rate
Depreciation
Incremental Depreciation
Incremental Depreciation Tax Benefit
A
B
C
D
E
F
G
A*B
D*E
C-F
G*Tax rate
1
270000
20%
54000
200000
19.20%
38400
15600
6240
2
270000
32%
86400
200000
11.52%
23040
63360
25344
3
270000
19.20%
51840
200000
11.52%
23040
28800
11520
4
270000
11.52%
31104
200000
5.76%
11520
19584
7833.6
5
270000
11.52%
31104
31104
12441.6
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