You must evaluate a proposal to buy a new milling machine. the base price is $10

Question

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 $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. the applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,500 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 buy $44,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

What is the project's annual cash flow for Year 3?

Explanation / Answer

Net cost of Machine= $108000+$12500+$5500 126000 Year 0 1 2 3 After-Tax Savings $28,600 $28,600 $28,600 Depreciation Tax Savings $13,918 $18,979 $6,326 Net Cash Flow $42,518 $47,579 $34,926 Terminal Cash Flow Salvage Value $65,000 Tax on Salvage Value $19,798 NWC Recovery $5,500 Terminal Cash Flow $50,702 Calculation of NPV Year Cash Flow PV Factor @ 12% PV 0 ($126,000) 1 ($126,000) 1 $42,518 0.8929 $37,962 2 $47,579 0.7972 $37,929 3 $85,629 0.7118 $60,949 NPV      $10,840

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