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

Following is the determination of the annual cash flows for the year 3:

Particulars Amount Amount Savings in costs 44000 Feasibility costs -5000 Income 39000 Less: Tax @35% 13650 Net income 126000*15% 25350 Add: Depreciation 18900 Cash flows for the year 44250 PV factor 0.7117 Present value of cash flows 31493

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