Reference no: EM131308851
A company is considering the purchase of a new machine that will enable it to increase its expected sales. The machine will have a price of $120,000. In addition, the machine must be installed and tested. The costs of installation and testing will amount to $30,000. The machine will be depreciated using 5-years MACRS. (Use MACRS table from class excel exercise by copying the table and pasting it)
The equipment will be operated for 5 years. The sales in the first year of operation are expected to be $260,000. Then, sales will grow by 5% a year. The annual operating costs (before depreciation) will consist of fixed operating costs of $25,000 plus variable operating costs equal to 75% of sales.
To support the increased level of production, the inventory of raw materials will have to be increased from $40,000 to $50,000 when the machine is purchased. The additional inventory will be carried until the machine is thrown away following the 5 years of operation.
At the end of the 5-year operating life of the project, it is assumed that the equipment will be sold for $50,000.
The tax rate is 40% and the company’s weighted average cost of capital is 9.50%.
Build a capital budgeting model to answer the following questions:
1) What is the operating cash flow in year 1-5?
2) What is the initial outlay in year 0?
3) What is the after tax salvage at the terminal year?
4) Calculate NPV, IRR, and PI for the project.
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