Question 2. (15 points) The Marchal Company is evaluating the proposed acquisiti
ID: 2738095 • Letter: Q
Question
Question 2. (15 points) The Marchal Company is evaluating the proposed acquisition of a new machine. The machine's base price is $250,000, and it would cost another $15,000 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 2 years for $75,000. The machine would require an increase in net working capital of $5,000. The machine would have no effect on revenues, but it is expected to save the firm $100,000 per year for 2 years in before-tax operating costs. Campbell's marginal tax rate is 30 percent and its cost of capital is 10 percent.
a. Calculate the cash outflow at time zero.
b. Calculate the net operating cash flows for Years 1 and 2.
c. Calculate the non-operating terminal year cash flow.
d. Calculate NPV. Should the machinery be purchased? Why or why not? Cost of capital
Explanation / Answer
Answer
Answer a.
The cash outflow at time zero is -270000 (see table in Answer d.)
Answer b.
The net operating cash flows (see table in Answer d.)
For Years 1 : $ 96497.35 ( $ 70000 + $ 26497.35)
For Year 2 : $ 110337.75 ( $ 70000 + $ 35337.75 + $ 5000)
Answer c.
(see table in Answer d.)
The non-operating terminal year cash flow is $ 70164.9
Answer d.
Figures in $
Year
Machine value
MACR Depreciation rate
Depreciation
Depreciation tax benefit
Closing value at end of year 2
Sales price
Gain
Tax on Gain
Sale value after Tax on gain
A
B
C
D
E
F
G
A*B
C*Tax rate
E-D
F*Tax rate
E-G
1
265000
33.33%
88324.5
26497.35
2
265000
44.45%
117792.5
35337.75
58883
75000
16117
4835.1
70164.9
Figures in $
Year
Saving in operating cost after tax
Depreciation tax benefit
Machine purchase price
Sale value after gain
Working capital
Cash flow
Disc Rate : 10%
Present value
A
B
C
D
E
F
G
Saving in operating cost before tax*(1 - tax rate)
As per above table
As per above table
A+B+C+D+E
F*G
0
-265000
-5000
-270000
1
-270000
1
70000
26497.35
96497.35
0.909091
87724.86
2
70000
35337.75
70164.9
5000
180502.7
0.826446
149175.7
Net Present value
-33099.4
Answer : Machinery should not be purchased as its NPV is negative.
Figures in $
Year
Machine value
MACR Depreciation rate
Depreciation
Depreciation tax benefit
Closing value at end of year 2
Sales price
Gain
Tax on Gain
Sale value after Tax on gain
A
B
C
D
E
F
G
A*B
C*Tax rate
E-D
F*Tax rate
E-G
1
265000
33.33%
88324.5
26497.35
2
265000
44.45%
117792.5
35337.75
58883
75000
16117
4835.1
70164.9
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