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Damon Corporation, a sports equipment manufacturer, has a machine currently in use that was originally purchased 3 years ag

The firm depreciates the machine under MACRS using a 5-year recovery period.
Once removal and clenaup costs are taken into consideration, the expected net selling price for the present machine will be $70

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.
It the firm acquires the new machine, its workign capital needs will change: Accounts receivable will increase $15,000, inventor

Earnings before depreciation, interest, and taxes (EBDIT) for the present machine are expected to be $95,000 for each of the s
For the proposed machine, the expected EBDIT for each OF THE NEXT 5 YEARS ARE $105,000, $110,000, $120,000, $120,0
The corporate tax rate (T) for the firm is 40%.
See Table 4.2 on page 120 for 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 remov
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

Use the Answer Sheet to answer the following:


a. initial investment
b. operating cash flows for both the prposed and the present machine
c. terminal cash flow associated with the project.
s originally purchased 3 years ago for $120,000.

r the present machine will be $70,000

e will increase $15,000, inventory will increase $19,000, and accounts payable will increase $16,000.

d to be $95,000 for each of the successive 5 years.


000, $110,000, $120,000, $120,000, $120,000, $120,000, respectively.

for $24,000 (after paying removable and cleanup costs).


The Damon Corporation

Calculation of the Initial Investment

Installed cost of proposed machine


Cost of proposed machine
plus: Installation costs
Total installed cost - proposed $ -
(depreciable value)

After-tax proceeds from sale of present machine


Proceeds from sale of present machine
less: Tax on sale of present machine 0
Total after-tax proceeds - present $ -

Change in net working Capital 0

Initial investment $ -

Tax on sale of old machine Change in Working Capital


cost of old machine Increase in receivables
MACRS increase in inventory
year 1 0 increase in payables
year 2 0 Net working capital $ -
year 3 0
Book Value $ -
Sale price of old machine $ -
Gain on sale $ -
Tax rate
Tax Expense $ -

Depreciation Expense for Proposed and Present


Machines for the Damon Corporation

Year Cost Applicable MACRS depreciation Depreciation

With proposed machine


1 $ - $0
2 0 0
3 0 0
4 0 0
5 0 0
6 0 0
Total 0% $ -

With present machine


1 $ - $ -
2 0 0
3 0 0
4 0
5 0
6 0
Total $ -

Calculation of Operating Cash Inflows for Damon Corporation


Proposed and Present Machines

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6


With proposed
Earnings before machine
depr. and int.
and taxes $ -
Depreciation 0 0 0 0 0 0
Earnings before interest and ta $ - $ - $ - $ - $ - $ -
Taxes 0% 0 0 0 0 0 0
Net operating profit after taxes $ - $ - $ - $ - $ - $ -
Depreciation 0 0 0 0 0 0
Operating cash inflows $ - $ - $ - $ - $ - $ -

With present machine


Earnings before depr. and int.
and taxes $ -
Depreciation 0 0 0 0 0 0
Earnings before interest and
taxes $ - $ - $ - $ - $ - $ -
Taxes 0% 0 0 0 0 0 0
Net operating profit after taxes $ - $ - $ - $ - $ - $ -
Depreciation 0 0 0 0 0 0
Operating cash inflows $ - $ - $ - $ - $ - $ -

Calculation of the Terminal Cash Flow

After-tax proceeds from sale of proposed machine


Proceeds from sale of proposed machine
Book value as of end of year 5 0
Net gain $ -
Tax on gain 0% 0
Total after-tax proceeds - proposed $ -

After-tax proceeds from sale of present machine


Proceeds from sale of present machine
Book value as of end of year 5 0
Net gain $ -
Tax on gain 0% 0
Total after-tax proceeds - present $ -

Change in net working capital $ -

Terminal Cash Flow $ -