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What are the net operating cash flows

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A company is evaluating the proposed acquisition of a new machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use. Depreciation rates are 0.33, 0.45, and 0.15 for years 1, 2, and 3, respectively, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. The company’s marginal tax rate is 35%.

a. What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year-0 net cash flow?)

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?

d. If the project’s cost of capital is 12%, should the machine be purchased?

Reference no: EM131948899

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