You must evaluate a proposal to buy a new milling machine. The base price is $13

Question

You must evaluate a proposal to buy a new milling machine. The base price is $138,000, and shipping and installation costs would add another $13,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $69,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $8,500 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 $31,000 per year. The marginal tax rate is 35%, and the WACC is 14%. 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.

$

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

Time line 0 1 2 3 Cost of equipment -138000 Installation cost -13000 Total investment in new machine -151000 Net working capital -8500 0 0 0 =Initial Investment outlay -159500 Savings in labor cost 31000 31000 31000 MACR rate 33.33% 44.45% 14.81% 7.41% -Depreciation MACR Rate* total investment -50328.3 -67119.5 -22363.1 -11189.1 =Salvage value = -19328.3 -36119.5 8636.9 -taxes =(savings- depreciation)*(1-tax) -12563.395 -23477.675 5613.985 +Depreciation 50328.3 67119.5 22363.1 =after tax operating cash flow 37764.905 43641.825 27977.085 Reversal of Net working capital 8500 Proceeds from sale of assets =selling price*(1 - tax rate) 44850 +Salvage book value * tax rate 3916.185 Terminal year non operating cash flows 57266.185 Total Cash flow for the period -159500.00 37764.91 43641.83 85243.27

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