solve Pll the work title, due date, and members\' names on top of your file. Do
ID: 2550945 • Letter: S
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Pll the work title, due date, and members' names on top of your file. Do not turn in a PDF file. Required fle name (use the last names of group members) Clinton Ford Trump 1. One year ago, HQ Company paid $20,000 to a consultant to review some new milling machines. Now, the company is evaluating the acquisition of a new milling is $108,000, and it would cost another $12,500 to modify it for special use by the firm. The machine falls into the MACRS 3 and it will be sold after 3 years for $65,000. The machine would require an increase in net would have no effet on reventes, but it is expected to save the firm $45,000 per year (- reveue cos) in working capital (inventory) of $5,500 in the beginning. The milling machine cost) in before-tax operating costs, mainly labor. The anaual interest revenue expense is ss,000. HQ's marginal tax rate is 25%. a. Calculate the net cost of the machine for capital budgeting purposes. (i.e., what is the Year O net cash flow?) b. Calculate the (net) operating cash flows in Years 1, 2, and 3. c. Calculate the after-tax salvage value. d. Calculate the terminal (year) cash flow e. If the project's cost of capital is i 2%, should the machine be purchased?Explanation / Answer
Answer a Calculation of net cost of the machine for capital budgeting purposes Year 0 Machine cost -$108,000.00 Machine Modification cost -$12,500.00 Increase in net working capital -$5,500.00 Year 0 Net Cash flow -$126,000.00 Answer b Calculation of net operating cash flows in Year 1,2 and 3 Year 1 2 3 Saving in operating cost $45,000.00 $45,000.00 $45,000.00 Interest expense -$5,000.00 -$5,000.00 -$5,000.00 Increase in Net Income $40,000.00 $40,000.00 $40,000.00 Tax @ 25% -$10,000.00 -$10,000.00 -$10,000.00 Tax savings due to depreciation $10,040.66 $13,390.56 $4,461.51 Net Operating Cash flow $40,040.66 $43,390.56 $34,461.51 Calculation of depreciation on machinery using MACRS -3 Year Class rates Year Capitalised cost of machinery Depreciation rate Depreciation Tax savings @ 25% 1 $120,500.00 33.33% $40,162.65 $10,040.66 2 $120,500.00 44.45% $53,562.25 $13,390.56 3 $120,500.00 14.81% $17,846.05 $4,461.51 $111,570.95 Answer c Calculation of after tax salvage value Salvage value of machinery $65,000.00 Less : Book value at the end of 3rd Year [$120500 - $111570.95] $8,929.05 Gain $56,070.95 Tax on Gain @ 25% $14,017.74 After tax salvage value (Salvage value - Tax) $50,982.26 Answer d Terminal year cash flow Year 3 Net operating cash flow $34,461.51 After tax salvage value $50,982.26 Terminal year cash flow $85,443.78 Answer e We can calculate the NPV i.e. net present value of project to determine whether machine is to be purchased or not. If NPV turns out positive , then HQ Company should purchase the machine. Year Cash flow Discount Factor @ 12% Present Value 0 -$126,000.00 1 -$126,000.00 1 $40,040.66 0.892857143 $35,750.59 2 $43,390.56 0.797193878 $34,590.69 3 $85,443.78 0.711780248 $60,817.19 Net Present value of the project. $5,158.47 As the NPV is positive , HQ Company should purchase the machine.
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