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 $101,000, and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $35,350. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $7,500 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 by $58,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
=$11650

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent.
Year 1 $    
Year 2 $    
Year 3 $    

Explanation / Answer

0 101000 machine cost 0 8000 Shipping & installation Cost 0 7500 NWC Net cash outflow 116500 salvage value 35350 Tax 35% Depreciation 101000 33% 33330 101000 45% 45450 101000 15% 15150 101000 7% 7070 Year Cost Saving Depreciation Net Income Tax @ 35% After Tax Add Back Depreciation(OCF) OCF 1 58000 33330 24670 8634.5 16035.5 49365.5 49365.5 2 58000 45450 12550 4392.5 8157.5 53607.5 53607.5 3 58000 15150 42850 14997.5 27852.5 43002.5 3 Sale Proceeds 35350 7070 28280 9898 18382 25452 3 NWC Recovery 7500 75954.5

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