letters a through e, show work. Thank you 1. [25 points] Burton, a manufacturer
ID: 2798688 • Letter: L
Question
letters a through e, show work. Thank you
1. [25 points] Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given. The proposed machine will cost $120,000 and have installation costs of $20,000. It will be depreciated using a 3 year MACRS recovery schedule. It can be sold for $60,000 after three years of use (before tax; at the end of year 3). The existing machine was purchased two years ago for $95,000 (including installation). It is . >pol) being depreciated using a 3 year MACRS recovery schedule. It can be sold today for$20,000, it can be used for three more years, but after three more years it will have no market value. The earnings before taxes and depreciation are as follows: . o New machine: Year 1: 133,000, Year 2: 96,000, Year 3: 127,000 Existing machine: Year 1: 84,000, Year 2: 70,000, Year 3: 74,000 o Burton pays 40 percent taxes on ordinary income and capital gains, and uses a WACC of 14% · The maximum payback period allowed is 3 years. . They expect a large increase in sales so their Net Working Capital will increase by $20,000 when they buy the machine and it will be recovered at the end of the project life. a. Calculate the initial investment required for this project. 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?Explanation / Answer
Cost of new machine 1,20,000 Installation cost 20,000 Resale value of old Machine -20,000 Tax Saving on sale of old machine -444 Additional Working Capital required 20,000 Initial Investment 1,39,556 Calculation of gain or loss on old machine Year Rate of Depn Depn Book value Resale Value Loss on sale Tax Saving 95,000 1 33.33% 31,664 63,337 2 44.45% 42,228 21,109 20,000 1,109 444 3 14.81% 14,070 7,040 4 7.41% 7,040 - b. Incremental After tax operating cash flow Year EBDT (N M/C) EBDT (O M/C) IncrementalEBIT Inc. Depn Inc. EBT Tax at 40% Inc. PAT INC. OCF 1 1,33,000 84,000 49,000 32,592 16,408 6,563 9,845 42,437 2 96,000 70,000 26,000 55,190 -29,190 -11,676 -17,514 37,676 3 1,27,000 74,000 53,000 20,734 32,266 12,906 19,360 40,094 Year Rate of Depn Depn (N) Depn (O) Incremental Depn Book Value (N) 1,40,000 1 33.33% 46,662 14,070 32,592 93,338 2 44.45% 62,230 7,040 55,190 31,108 3 14.81% 20,734 - 20,734 10,374 4 7.41% 10,374 - - c Terminal cash flow of the project Residual value of the new machine 60,000 Release of the woking capital 20,000 Tax on gain on sale of m/c -19,850 =(60000-10374)*40% Terminal cash flow 60,150 d Disc payback,NPV,IRR,MIRR 14% Year INC OCF Capital flow FCF Disc. Fact Dis cash flow Cummulative 0 -1,39,556 -1,39,556 1 -1,39,556 -1,39,556 1 42,437 42,437 0.877192982 37,225 -1,02,331 2 37,676 37,676 0.769467528 28,990 -73,340 3 40,094 60,150 1,00,243 0.674971516 67,661 -5,679 NPV -5,679 it does not have IRR, MIRR as it NPVRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.