Question

Johnson Products is considering purchasing a new milling machine that costs $120,000. The machine’s installation and shipping costs will total $4,500. If accepted, the milling machine project will require an initial net working capital investment of $20,000. Johnson plans to depreciate the machine on a straight-line basis over a period of 8 years. About a year ago, Johnson paid $12,000 to a consulting firm to conduct a feasibility study of the new milling machine. Johnson’s marginal tax rate is 40 percent.

1. Calculate the project’s net investment (NINV). Round your answer to the nearest dollar.

   $  

2. Calculate the annual straight-line depreciation for the project. Round your answer to the nearest cent.

   $  

3. Calculate MACRS depreciation assuming this is a 7-year class asset. Use Table 9A-3 to answer the question. Round your answers to the nearest dollar.

   Year	Depreciation
   1	$
   2	$
   3	$
   4	$
   5	$
   6	$
   7	$
   8	$

Answer 1

a) New machine cost Add: Installation & shipping cost Add: Working capital $ $ $ 120,000 4,500 20,000 Net investment $ 144,500 b) Annual depreciation $ 15,562.50 =(120000+4500)/8

2 All 3 Year Depreciation (MACRS Rate*Asset cost) 1 $ 17,791.05 =124500*14.29% $ 30,490.05 =124500*24.49% $ 21,775.05 =124500*17.49% 4 $ 15,550.05 =124500*12.49% 5 $ 11,117.85 =124500*8.93% $ 11,105.40 =124500*8.92% 7 $ 11,117.85 =124500*8.93% $ 5,552.70 =124500*4.46% Ale 6 B

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