Should the maching be purchased

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Reference no: EM13283832

You must evaluate a proposal to buy a new milling machine. The base price is $108,000 and shipping and installation costs would add 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% smf 7%. The machine would require a $5,500 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 $44,000 per yeaer. The marginal tax rate is 35% and the WACC is 12%. 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 capital budgeting purposes, that is what is the yaer 0 project cash flow?c. What are the project's annual cash flows during years 1, 2, ,and 3? Should the maching be purchased? Explain your answer.

Reference no: EM13283832

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