NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine.

Question

NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $188,000, and shipping and installation costs would add another $11,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,800. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $51,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

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 $

Explanation / Answer

Since NPV is negative proposals should not be accepted.

Best of Luck. God Bless

A B C D Year 0 1 2 3 1 Machine cost 188000 2 Shipping and installation cost 11,000 3 Increase in net working capital 4000 4 Reduction in pretax labour cost 51000 51000 51000 5 Depreciation Rate 33% 45% 15% 6 Depreciation 62040 84600 28200 7 EBT -11040 -33600 22800 EBT = Reduction in pretax labour cost-Depreciation 8 Tax rate= EBT * Tax rate -3864 -11760 7980 9 EAT= EBT -Tax -7176 -21840 14820 10 Depreciation 62040 84600 28200 11 After Tax Salvage value 42770 Salvage value * (1-tax rate) 12 Free Cash Flows 203,000 54864.00 62760.00 85790.00 EAT + Depreciation 13 Discount rate 10% NPV -36,800.5710 NPV(A13,B13:D13)-A12

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