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

Solution -

Please note -

Shipping & installation costs would be considered as initial Cost if machine and hence added in the Cost

Cost spend on investigating the feasibility is not considered in Project analysis and its a already spend whether we accept the project or not

Working Capital invested initially is assumed to be in place at the end of the project however will be valued at the present value

Below is the NPV calculation

0 1 2 3 Total a Initial Cash Inflow Cost + shipping and installation) -1,20,500 c Saving on reduced Employees ( 2 employees) 44000 44000 44000 e Depreciation @ % of depreciation given 39765 54225 18075 f Net Profit by this activity (c-e) 4235 -10225 25925 g Taxes at 35% of Net Profit 1482 -3579 9074 h Profit after Tax ( f-g) 2753 -6646 16851 i Net Cash Flow ( h + e ) ( adding Back Depreciation ) 42518 47579 34926 j Salvage Value ( tax effect Taken ) Refer Working Note 45202 s Working Capital effect -55000 55000 k Final /Total Net Cash Flow ( a+i+j+s) -1,75,500 42518 47579 135129 L Present Value factor @ 12% 1 0.8929 0.7972 0.7118 P Net Present Value( k x L )      -1,75,500       37,962           37,929           96,182         -3,426

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.