Question

You must evaluate a proposal to buy a new machine. The base price is $101,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $70,700. The applicable deprecation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,000 increase in net operating capital. there would be no effect on revenues, but pretax labor costs would decline by $58,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.

1. What is the initial investement outlay for the machine for capital budgeting purposes, that is, what is the year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent.

2. What are the projects annual cash flows during the years 1, 2, and 3?

3. Should the machine be purchased?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

C w ENG 07:33 30-07-2020 99+ 27 Х UY260 fx < UW UX UY UZ VA VB VC VD VE VE 257 0 1 2 3 258 259 260 261 262 263 264 265 266 267 -117000 YEAR COST OF ASSET [101000 + 16000] WORKING CAPITAL SAVINGS IN LABOR COSTS -6000 58000.00 58000.00 58000.00 LESS LESS 38610.00 52650.00 COSTS DEPRECIATION INCOME BEFORE TAX TAX = 5350.00 1872.50 LESS 19390.00 6786.50 12603.50 38610.00 = 3477.50 52650.00 56127.50 -123000 17550.00 40450.00 14157.50 26292.50 17550.00 43842.50 6000.00 48821.50 (SEE NOTE) 98664.00 268 269 270 271 272 273 274 275 276 277 278 51213.50 NET INCOME ADD DEPRECIATION OPERATING CASH FLOW ADD RECOVERY OF WORKING CAPITAL ADD AFTER TAX SALVAGE VALUE OF ASSET NET CASH FLOW 1/(1+r)^n = PV FACTOR AT 11% PV OF CFAT (A-B) -123000 51213.50 56127.50 1 0.9009 0.7312 0.8116 45554.34 -123000 46138.29 72142.27 40834.89 NPV 279 NPV 40834.89 280 IRRnpvbeta HPR GMAM EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN ... +

07:34 C w ENG 99+ 30-07-2020 27 Х UZ298 fic UW UX UY UZ VA VB VC VD VE VE 280 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 281 282 283 284 285 286 287 288 289 290 291 1 YEAR O CASH FLOW 123000.00 2 YEAR 1 CASH FLOW 51213.50 YEAR 2 CASH FLOW 56127.50 YEAR 3 CASH FLOW 98664.00 ( INCLUDING WORKING CAPITAL RECOVERY AND AFTER TAX SALVAGE ] 3 NPV 40834.89 YES, as NPV is POSITIVE, machine should be purchased 292 293 294 295 296 297 298 299 300 301 302 303 IRRnpvbeta HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN ... +

07:34 C w ENG 99+ 30-07-2020 27 Х VP274 ... fc VE VG VH VI VJ VK VL VM VN VO VP 256 257 258 259 260 261 NOTE 262 117000 COST OF ASSET DEPRECIATION YEAR RATE 263 264 265 266 267 DEPRECIATION BOOK VALUE 38610 78390 1 33.00% 45.00% 2 52650 25740 3 17550 8190 15.00% 7.00% 4 8190 0 268 269 270 271 272 273 NOTE SALVAGE VALUE BOOK VALUE 70700.00 A 8190.00 PROFIT ON SALE 62510.00 274 (A-B) 21878.50 B TAX ON PROFIT AFTER TAX SALVAGE VALUE 48821.50 A-B 275 276 277 278 279 IRRnpvbeta HPR GMAM EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN ... +