CellU, a subsidiary of CompU, is looking to replace one of the machines they use

Question

CellU, a subsidiary of CompU, is looking to replace one of the machines they use to manufacture cell phones with a new, more efficient model. The current machine cost $7,500, is three years old, and is depreciated using the MACRS 3-year recovery period. The current machine could be sold now for $1,000, but at the end of 3 years it would be worthless. The cost of the new machine is $11,500, installation costs are $500, and would require an increase in net working capital of $1,000. The expected life of the new machine is 3 years, is depreciated using the MACRS 3-year recovery period, and will reduce annual labor expenses from $10,000 to $4,000. At the end of the project the firm will be able to sell the new machine for $3,000 and recover their investment in net working capital. The firm has a marginal tax rate of 40 percent.

a. Calculate the initial investment of the new machine.

Explanation / Answer

c) terminal value of machine = 7500 -1000 =$6500

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