The Campbell Company is evaluating the proposed acquisition of a new milling mac
ID: 2669082 • Letter: T
Question
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use by your firm. The machine falls into the MACRS 3 year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capitol (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs mainly labor. Campbell’s marginal tax rate is 35 percent.a) What is the net cost of the machine for capitol budgeting purposes? (That is what is the year 0 net cash flow?)
b) What are the net operating cash flows in years 1, 2, and 3?
c) What is the terminal year cash flow?
Explanation / Answer
Cost of machine
Base price
108000
Modification cost
12500
working capital
$5,500
a) What is the net cost of the machine for capitol budgeting purposes? (That is what is the year 0 net cash flow?)
answer ---------$126,000
==============================
b) What are the net operating cash flows in years 1, 2, and 3?
Year 1
Year 2
Year 3
After tax
28600
28600
28600
depreciation
13918
18979
6326
Net cash
42,518
47,579
34,926
c) What is the terminal year cash flow?
Salvage value--------65000
Tax -------------------19798
Return of nwc-----------5500
-------------------------------50,702
BV in the year 4= 120,500 x 0.07= 8,435
Tax on sv--------------------19,798
new project accepted
Cost of machine
Base price
108000
Modification cost
12500
working capital
$5,500
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