Question

Dayman Inc. has asked you to evaluate a proposal to buy a new costume machine. The base price is $112,000, and shipping and installation costs would add another $25,000. The machine falls into the MACRS 3-year class, and it would be sold after another 3 years for $35,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $7,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $56,000 per year. The marginal tax rate is 45%, and the WACC is 11.77%. Also, the firm spent $15,000 last year investigating the feasibility of using the machine.

What is the project’s total cash flow at year 3 (1 point) and should the project be accepted (1 point) considering only NPV? Round answers to nearest cent (two decimal places). You must show your work to receive full credit.

Answer 1

Dayman	0	1	2	3
MACRS %		33%	45%	15%	7.0%
Investment	-147,000				10290
Salvage				35,000
NWC	-7,500			7,500
Savings		56,000	56,000	56,000
Depreciation		-48,510	-66,150	-22,050
EBT		7,490	-10,150	33,950
Tax (45%)		-3,371	4,568	-15,278
Profits		4,120	-5,583	18,673
Cash Flows	-154,500	52,630	60,568	72,103
NPV	-$7,290.74

Depreciation = Investment x MACRS%

Cash Flows = Investment + NWC + Profits + Depreciation + After-tax Salvage Value

NPV can be calculated using the same function in excel or calculator with 11.77% discount rate.