the sharpetouch company is evaluating the proposed acquisition of a new molding

Question

the sharpetouch company is evaluating the proposed acquisition of a new molding machine. the machines purchase price is $108,000 and it would cost another $12,000 to modify it for it to be operational. the machine falls into the MACRS three year class. it would require an increase in networking capital(inventory) of $5,500 at time 0. the modding machine will increase the firm's before tax revenue by $80,000 power year but would also increase its operating costs on before tax basis by $35,000 per year. the molding machine is expected to be used for three years and then be sold for $60,000. sharpetouch marginal tax rate is 40 percent and then projects cost of capital is 12 percent. should the machine be purchased? why or why not? support your answer with numeral work.

Explanation / Answer

Purchase price 108000 Modify 12000 120000 Dep: 1 39996 2 53340 3 17772 Total 111108 WDV 8892 Sale value 60000 Profit 51108 TAX 20443.2 After tax sale value 39556.8 Inventory 5500 Inc in revenue 80000 cost 35000 45000 Year 0 1 2 3 Ouflow -125500 (inventory+cost) Profit 45000 45000 45000 Dep 39996 53340 17772 PBT 5004 -8340 27228 Tax 2001.6 -3336 10891.2 PAT 3002.4 -5004 16336.8 ADD: Dep 39996 53340 17772 CF 42998.4 48336 34108.8 Sale value 39556.8 Total CF -125500 42998.4 48336 73665.6 DF 1 0.89285 0.79719 0.71178 PV cashflow -125500 38391.12 38532.98 52433.7 NPV    3,857.80 AS the NPV is positive machine should be purchased.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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