What is the initial investment outlay for the machine

Assignment Help Financial Management

Reference no: EM132025568

You must evaluate a proposal to buy a new milling machine. The base price is $186,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $74,400. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,000 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 $52,000 per year. The marginal tax rate is 35%, and the WACC is 13%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. How should the $5,000 spent last year be handled? The cost of research is an incremental cash flow and should be included in the analysis. Only the tax effect of the research expenses should be included in the analysis. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.

$ ______ What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

Year 1 $ _______

Year 2 $ _______

Year 3 $ _______

Should the machine be purchased?

Reference no: EM132025568

Questions Cloud

What implications do you think for your life : Elaborate discussion forum by answering the following question(s) (400 wordsor more/ Times New Roman, 10/ *double spaced not necessary for non-essay questions*)

Generate a binomial tree to value the development option : Generate a binomial tree (each stage of the tree being one year) to value the development option and make a decision.

What would happen to the stock required rate of return : If the market risk premium increased to 10%, what would happen to the stock's required rate of return?

What is the initial investment outlay for spectrometer : What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?

What is the initial investment outlay for the machine : What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow?

Discuss the stress impact on children and family : Research an incidence or situation in the United States. Clearly explain Trauma and The United States: Military Family stress, and the stress impact on children

Generate new tree for boeing option : Generate a new tree for Boeing’s option with a volatility of 45% annually rather than 38% annually.

Describe the methodology and results of the study : Describe the methodology and results of the study reported in the article or write a brief summary of the concepts presented in the article.

What was your total return for last year : You bought a share of 4 percent preferred stock for $95.90 last year. The market price for your stock is now $97.38 What was your total return for last year?

User Account

All Pages