My Institution-9-29-20 Cengage x / MindTaP-Cengage Lea × \\ e Chegg Study | Guid

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My Institution-9-29-20 Cengage x / MindTaP-Cengage Lea × e Chegg Study | Guided S: XHow to take a screensh: C | ng·cengage.com/static/nb/ui/index.html?nbld-638982&nbNodeld;:235883999&eISBN;:9781 305635975&parentld;:235884473 MINDTAP Michael Britsch (? EOC Problem Set Chapter 12 Due on Tomorrow at 11:59 PM EST NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $13,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $75,600. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,000 increase in net operating working capital (increased inventory le55 increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $53,000 per year. The marginal tax rate is 35%, and the WACC i5 13%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. a. How should the $5,000 spent last year be handled? t. 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 II. 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. III. 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. IV. The cost of research is an incremental cash flow and should be included in the analysis. V. Only the tax effect of the research expenses should be included in the analysis. -Select- b. 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. c. 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$ d. Should the machine be purchased? -Select- O Type here to search 11:00 AM 12/9/20173

Explanation / Answer

a) The $5,000 spent last year should be handled as :- Last year's expenditure is considered as sunk cost and does not represent an incremental cash flow. Hence, It should not be included in the analysis.

b) The initial investment outlay for the machine at year 0 = $108,000+$13,000+$9,000 = $130,000

c) Calculation of cash flows (Amount in $)

d) For deciding about purchasing the machine, we need to calculate net present value of machine which is calculated as follows:- (Amount in $)

As there is NPV of $37,237.11, the machine should be purchased.

Years Labor cost saving after tax (A) Depreciation (B) Tax savings on Depreciation (C = B*0.35) Total cash flows (A+C) 1 53,000(1-0.35) = 34,450 (121,000*33%) = 39,930 13,975.50 48,425.50 2 34,450 (121,000*45%) = 54,450 19,057.50 53,507.50 3 34,450 (121,000*15%) = 18,150 6,352.50 40,802.50 4 (121,000*7%) = 8,470 2,964.50 2,964.50

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