Marginal tax bracket, Taxation

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Maskot Industries wishes to determine whether it would be advisable to replace an existing, fully depreciated machine with a new piece of equipment.
The new machine will cost $300,000. It will be depreciated (straight line) over a four-year period, assuming a salvage value of $25,000.
The old machine could be sold today at $80,000.

The firm is in the 33.00% marginal tax bracket and requires a minimum return on the replacement decision of 8.00%.

The firm's estimates of its revenues and expenses (excluding depreciation) for both the new and old machines, over the next four years, are given in the provided workbook. Mascot also estimated the values of various current accounts that would be impacted by the proposed replacement. They are also shown, in the provided workbook, for both the new and old machines over the next four years. Currently, the firm's net investment in these current accounts is assumed to be $80,000.

Mascot estimates that after four years of operations, the machine will be sold for $50,000. Also assume that remaining net working capital, at the end of year four, will be rolled over to the next project.

Follow the steps below to complete the provided template.
You will also be asked to load your spreadsheet at the end of this assignment.

A. Under "Section A. Provided Data", add the missing value drivers. Calculate the necessary incremental cash flows.

B.Under "Section B. DCF Model", following the given time line, calculate the annual FCFs and the project's net present value and internal rate of return.

Write a short interpretation of the results.

C. Pick two independent variables of your choice and replace those variables with combo boxes. Each combo box should offer at least 5 different choices. Make sure that all the choices maintain the model integrity.

D. Under "Section D. Analysis", explain how sensitive Mascot's project is to the two chosen independent variables.


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