Determine the payback period of the project

Reference no: EM132480752

Point 1: Damon corporation, a sports equipment manufacturer, has a machine currently in use that was originally purchased 3 years ago for $120,000. The firm depreciates the machine under MACRS using a 5-year recovery period. Once removal and cleanup costs are taken into consideration, the expected net selling price for the present machine will be $70,000.

Point 2: Damon can buy a new machine for a net price of $160,000 (including installation costs of $15,000). The proposed machine will be depreciated under MACRS using a 5-year recovery period. If the firm acquires the new machine, its working capital needs will change : Accounts receivable will increase $15,000, inventory will increase $19,000, and accounts payable will increase $16,000

Point 3: Earnings before depreciation, interest, and taxes (EBDIT) for the present machine are expected to be $95,000 for each of the successive 5 years. For the proposed machine, the expected EDBIT for each of the next 5 years are $105,000, $110,000, $120,000, $120,000, and $120,000, respectively. The corporate tax rate (T) for the firm is 40%. (Table 4.2 on page 166 contains the applicable MACRS depreciation percentages.)

Point 4: Damon expects to be able to liquidate the proposed machine at the end of its 5-year usable life for $24,000 (after paying removal and cleanup costs). The present machine is expected to net $8,000 upon liquidation at the end of the same period. Damon expects to recover its net working capital investment upon termination of the project. The firm is subject to a tax rate of 40%.

Question a. Create a spreadsheet to calculate the initial investment

Question b. Create a spreadsheet to prepare a depreciation schedule for both the proposed and the present machine. Both machine are depreciated under MACRS using a 5-year recovery period. Remember that the present machine has only 3 years of depreciation remaining.

Question c. Create a spreadsheet to calculate the operating cash flows for Damon Corporation for both the proposed and the present machine.

Question d. Create a spreadsheet to calculate the terminal cash flow associated with the project.

Question e. Determine the payback period of the project?

Question f. Determine the profitability index of the project?

Question g. Determine the IRR of the project?

Question h. Determine the NPV of the project?

Question i. Provide the recommendation based on your analysis on those criteria

Reference no: EM132480752

Questions Cloud

What is the safety margin ratio at the given level of sales : What is the break-even point? What is the safety margin ratio at the given level of sales? What is the degree of operating leverage?

Compute all six variances : Compute all 6 variances and for each of them determine if they are favored or adverse, information is given about the unit standard costs

Prepare the appropriate entries for both Nguyen and Nevels : Nevels expects the residual value at December 31, 2024, will be $114,000. Prepare the appropriate entries for both Nguyen and Nevels on January 1, 2021

Determine which financial ratio would relevant to creditor : Determine Which financial ratio would be relevant to creditors such as the bank and why are these ratios of concern to the bank? and provide the example

Determine the payback period of the project : Create a spreadsheet to calculate the operating cash flows for Damon Corporation for both the proposed and the present machine.

Analyzing the changes in Allowance for Doubtful Accounts : The balance in Allowance for Doubtful Accounts was $119,600 (Cr.) at January 1, 2020. Analyzing the changes in Allowance for Doubtful Accounts

Evaluate the accounting policies followed by a company : Who relies on financial statement of a company, besides potential purchaser? And can them place any kind of restriction on the company?

The saints and the roughnecks : To what degree did the labels applied to these boys affect their later lives? How might you separate the effect of the label from the effect to social class?

Determine and compute the equivalent units of production : Compute the equivalent units of production. Determine the cost of ending work in process inventory and of the units transferred to the Coating Department.

User Account

All Pages