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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

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.

Facts

Existing Machine Proposed Machine

Cost = $100,000 Cost = $150,000

Purchased 2 years ago Installation = $20,000

Depreciation MACRS 5 years Depreciation MACRS 5 years (Table 4.2 page 151 of the text)

Current market value = $105,000

Five year usable life remaining Five year usable life expected

Earnings before Depreciation and Taxes

Existing Machine Proposed Machine

Yr 1 $160,000 Yr 1 $170,000

2 $150,000 2 $170,000

3 $140,000 3 $170,000

4 $140,000 4 $170,000

5 $140,000 5 $170,000

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

Calculate the incremental depreciation. (See Table 11.4). You need to show the depreciation for each year (there should be 5 numbers; make sure you label the years correctly).

Example

Yr $

1 $7,581

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Understanding the Problem We need to calculate the incremental depreciation for the proposed machine which is the difference in depreciation between the new and old machines Key points Both machines u... blur-text-image

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