1. Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a...

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1. Burton, a manufacturer of snowboards, is consideringreplacing an existing piece of equipment with a more sophisticatedmachine. The following information is given.
The proposed machine will cost $120,000 and have installationcosts of $20,000. It will be depreciated using a 3 year MACRSrecovery schedule. It can be sold for $60,000 after three years ofuse (before tax; at the end of year 3).
The existing machine was purchased two years ago for $95,000(including installation). It is being depreciated using a 3 yearMACRS recovery schedule. It can be sold today for $20,000. It canbe used for three more years, but after three more years it willhave no market value.
The earnings before taxes and depreciation (EBITDA) are asfollows: oNew machine: Year 1: 133,000, Year 2: 96,000, Year 3:127,000 oExisting machine: Year 1: 84,000, Year 2: 70,000, Year 3:74,000
Burton pays 40 percent taxes on ordinary income and capitalgains, and uses a WACC of 14%.
The maximum payback period allowed is 3 years.
They expect a large increase in sales so their Net WorkingCapital will increase by $20,000 when they buy the machine and itwill be recovered at the end of the project life.
a.Calculate the initial investment required for thisproject.
b.Determine the incremental after-tax operating cash flows
c.Find the terminal cash flow for the project
d.Find the Discounted Payback period, NPV, IRR, and MIRR.
e.Should the new machine be purchased? Why or why not?

Answer & Explanation Solved by verified expert

3.7 Ratings (499 Votes)

1cost of new machine with installation140000sale proceeds of old machine20000purchase price of old machine95000tax credit on loss on sale of old machine4436accumulated depreciation73891Investment in working capital20000book value at the end of 2nd year21109net initial investment1395564selling price of old machine20000loss on sale of old macine1109Year0123tax credit on loss on sale of old machine1109404436net initial investment1395564incremental EBITDA490002600053000Yearcost of machineMacrs rateannual depreciationless See Answer

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Transcribed Image Text

1. Burton, a manufacturer of snowboards, is consideringreplacing an existing piece of equipment with a more sophisticatedmachine. The following information is given.The proposed machine will cost $120,000 and have installationcosts of $20,000. It will be depreciated using a 3 year MACRSrecovery schedule. It can be sold for $60,000 after three years ofuse (before tax; at the end of year 3).The existing machine was purchased two years ago for $95,000(including installation). It is being depreciated using a 3 yearMACRS recovery schedule. It can be sold today for $20,000. It canbe used for three more years, but after three more years it willhave no market value.The earnings before taxes and depreciation (EBITDA) are asfollows: oNew machine: Year 1: 133,000, Year 2: 96,000, Year 3:127,000 oExisting machine: Year 1: 84,000, Year 2: 70,000, Year 3:74,000Burton pays 40 percent taxes on ordinary income and capitalgains, and uses a WACC of 14%.The maximum payback period allowed is 3 years.They expect a large increase in sales so their Net WorkingCapital will increase by $20,000 when they buy the machine and itwill be recovered at the end of the project life.a.Calculate the initial investment required for thisproject.b.Determine the incremental after-tax operating cash flowsc.Find the terminal cash flow for the projectd.Find the Discounted Payback period, NPV, IRR, and MIRR.e.Should the new machine be purchased? Why or why not?