Question $1($Total $60$ marks$)$

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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 following information is given.

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FIGURE $1$

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Facts

Existing Machine$$ Proposed Machine

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

Purchased $2$ years ago$$ Installation $=$ $$20,000$ Depreciation using MACRS over$$ Depreciation$--$the MACRS

a $5-$year recover schedule$5-$year recovery schedule will be used. Current market value $=$ $$105,000$

Five year usable life remaining$$ Five year usable life expected

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Earnings Before Depreciation and Taxes

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Existing Machine$$ Proposed Machine

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Year$1$

$$160,000$

Year

$1$

$$170,000$

$2$

$150,000$

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$2$

$170,000$

$3$

$140,000$

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$3$

$170,000$

$4$

$140,000$

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$4$

$170,000$

$5$

$140,000$

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$5$

$170,000$

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

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a$)$ Given the information in Figure $1,$ compute the initial investment. $(10$ marks$)$

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b$)$ Given the information in Figure $1,$ compute the incremental annual cash flows.

$(20$ marks$)$

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c$)$ Given the information in Figure $1,$ compute the payback period. $(15$ marks$)$

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d$)$ Given the information in Figure $1$ and $15$ percent cost of capital,

i$.$ compute the net present value. $(10$ marks$)$

ii$.$ Should the project be accepted? $(5$ marks$)$