Reference no: EM131021968
You must evaluate a proposal to buy a new milling machine. The base price is $108,000 and the shipping and installation costs would ass another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require $55,000 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 $44,000 per year. THe marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
a. How should the $5,000 spent last year be handled?
b. What is the initial investment outlay for the machine for caputal budgteing purposes, that is, what is the year 0 project cash flow?
c. What are the project's annual cash flows during years 1, 2, and 3?
d. Should the machine be purchased? Explain.
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: You must evaluate a proposal to buy a new milling machine. The base price is $108,000 and the shipping and installation costs would ass another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. Wh..
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