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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