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