You must evaluate a proposal to buy a new milling machine. The base price is $177,000, and shipping and installation costs would add another $9,000. The machine falls into the MACRS 3year class, and it would be sold after 3 years for $61,950. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,500 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 $50,000 per year. The marginal tax rate is 35%, and the WACC is 14%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
What is the initial investment outlay for the machine for
capital budgeting purposes, that is, what is the Year 0 project
cash flow? Round your answer to the nearest cent.
$
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 $
a.I. a sunk cost, no incremental cash flow, should not be included
b.Initial investment outlay = Cost of machine + installation cost + investment in working capital
= 177,000 + 9,000 + 9,500
= $195,500
c.
Year 1 
2 
3 

Savings in Labor cost 
50,000 
50,000 
50,000 
LesS: Depreciation 
61,380 
83,700 
27,900 
Net income before tax 
11,380 
33,700 
22,100 
Less: tax 
3,983 
11,795 
7,735 
Income after tax 
7,397 
21,905 
14,365 
Add: Depreciation 
61,380 
83,700 
27,900 
Cash Flow 
53,983 
61,795 
42,265 
Working capital released 
9,500 

After tax salvage value 
44,824.5 

Cash flow 
53,983 
61,795 
96,589.5 
d. NPV = 53,893/(1.14) + 61,795/(1.14)^{2} + 96,589.5/(1.14)^{3}_{–} 195,500
= $35,481.03
Since NPV is negative, machine SHOULD NOT be purchased
Get Answers For Free
Most questions answered within 1 hours.