The Metals by Design Company is evaluating the proposed acquisition of a new mil

Question

The Metals by Design Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $100,000, and it would cost another $9,000 to modify it for special use by the firm. The machine falls into the MACRS 3-year class, and it would be sold after three years for $70,000. The machine would require net working capital (inventory) investment of 15.00% of the following year’s forecasted revenues (adjust for the amount invested in NWC at the end of the previous period). The milling machine will result in an increase in production of 2,500; 25,000; and 25,000 units in each of the next three years, respectively. The current price per unit is $3.00. You should assume that price per unit will increase by 1%, 2%, and 3% annually over the next three years, respectively. The new milling machine is expected to save the firm $25,000, 40,000, and 40,000 per year for years 1-3 in before-tax operating costs, mainly labor. Metals by Design’s tax rate is 40%.

(1) What is the initial investment excluding the investment in NWC at t=0? What is the NWC investment in each year, 0-3?

(1) Calculate the Depreciation Schedule including depreciation expense and book value. Use cost allocation to four decimal positions. Ex. 0.3333

(1) What are the incremental after-tax operating cash flows for years 1, 2, and 3?

(1) What is the net proceeds from the sale of the milling machine at the end of year 3?

(3) Assuming the project’s required rate of return is 22%, should the machine be purchased? You must use nested =IF() logical statements to automatically report your recommendation and why.

Calculate the payback period and decide whether to accept or reject. Must use a nested =IF() for this calculation and recommendation. Be careful. What if you aren’t given a maximum payback period?

Calculate the net present value and decide whether to accept or reject and why.

Calculate the internal rate of return and decide whether to accept or reject and why.

Calculate the profitability index and decide whether to accept or reject and why.

Calculate the modified internal rate of return and decide whether to accept or reject and why.

Explanation / Answer

Investment in machine year amount remark 0 $ 100000 purchase cost 0 $ 9000 special use Total $ 109000 statement of saving on yearly basis due to new machine Year 1 2 3 Unit 2500 25000 25000 price 3 3 3 % increase 1% 2% 3% Revised price 3.03 3.06 3.09 Product cost 7575 76500 77250 + Saving per year 25000 40000 40000 - Tax 40% 13030 46600 46900 Net benefit 19545 69900 70350 ….@ 15% discount factor Year Value PVIF Value Net 0 -109000 1 -109000 1 19545 0.869565 16995.65 2 69900 0.7561 52851.39 3 70350 0.6575 46255.13 3 70000 0.6575 46025 Net 53127.17 ….@ 22% discount factor Year Value PVIF Value Net 0 -109000 1 -109000 1 19545 0.8197 16021.04 2 69900 0.6719 46965.81 3 70350 0.5374 37806.09 3 70000 0.5374 37618 Net 29410.94

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