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What is the total initial investment for capital budgeting

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Reference no: EM132664003

Question - New Project Analysis

Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $120,000, and it would cost another $9,500 to modify it for special use. The machine falls into Class 8 with a 20% CCA rate, and it would be sold after 4 years for $60,000. The machine would require an increase in net working capital (inventory) of $7,500. The milling machine would have no effect on revenues, but it is expected to save the firm $31,000 per year in before-tax operating costs, mainly labour. Campbell's marginal tax rate is 30%.

Required -

1. What is the total initial investment for capital budgeting purposes? (That is, what is the Time 0 net cash flow?)

2. What is the PV of the project cash flows using an 11% cost of capital?

3. What is the PV of the CCA tax shield?

4. What is the PV of the additional Year 4 cash flow?

5. If the project's cost of capital is 11%, should the machine be purchased?

Reference no: EM132664003

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