Initial investment for capital budgeting purposes

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The XYZ Company is evaluating the proposed acquisition of a new stamping machine. The machine's base price is $275,000 and it would cost another $10,000 to install a modification for their particular use requirements. The machine falls into a 20% CCA rate and will be sold after 5 years for $85,000. The machine requires an increase in net working capital (inventory) $9,000. The milling machine would have no effect on revenues, but it is expected to save the firm $42,000 per year in before-tax operating costs. Clancy's marginal tax rate is 32%.

a. What is the total initial investment for capital budgeting purposes?

b. What is the PV of the projected cash flows using a 13% cost of capital?

c. What is the PV of the projected cash flows using a 9.5% cost of capital?

Reference no: EM132842661

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