Question

NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $188,000, and shipping and installation costs would add another $11,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,800. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,000 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 $51,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

Year 1 $

Year 2 $

Year 3 $

Answer #1

A | B | C | D | ||||

Year | 0 | 1 | 2 | 3 | |||

1 | Machine cost | 188000 | |||||

2 | Shipping and installation cost | 11,000 | |||||

3 | Increase in net working capital | 4000 | |||||

4 | Reduction in pretax labour cost | 51000 | 51000 | 51000 | |||

5 | Depreciation Rate | 33% | 45% | 15% | |||

6 | Depreciation | 62040 | 84600 | 28200 | |||

7 | EBT | -11040 | -33600 | 22800 | EBT = Reduction in pretax labour cost-Depreciation | ||

8 | Tax rate= EBT * Tax rate | -3864 | -11760 | 7980 | |||

9 | EAT= EBT -Tax | -7176 | -21840 | 14820 | |||

10 | Depreciation | 62040 | 84600 | 28200 | |||

11 | After Tax Salvage value | 42770 | Salvage value * (1-tax rate) | ||||

12 | Free Cash Flows | 203,000 |
54864.00 |
62760.00 |
85790.00 |
EAT + Depreciation | |

13 | Discount rate | 10% | |||||

NPV |
-36,800.5710 |
NPV(A13,B13:D13)-A12 |

Since NPV is negative proposals should not be accepted.

Best of Luck. God Bless

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