PLASE SHOW ALL WORK: Dayman Inc. has asked you to evaluate a proposal to buy a n

Question

PLASE SHOW ALL WORK:

Dayman Inc. has asked you to evaluate a proposal to buy a new costume machine. The base price is $110,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after another 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 by $49,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $15,000 last year investigating the feasibility of using the machine. What is the project’s cash flow at year 3 (1 point) and should the project be accepted (1 point)? Round answers to nearest dollar.

Explanation / Answer

Assuming NWC will be returned at project end. Year 0 Year 1 Year 2 Year 3 Year 4 MACRS rate 33% 45% 15% 7% Asset Cost            125,000.00 Book Value at year 3 end=               8,750.00 Sale value after year 3             65,000.00 Capital Gain             56,250.00 Tax @35% on Capital Gain=             19,687.50 NPV Details Year 0 Year 1 Year 2 Year 3 Cost Of Machine        (125,000.00) NWC Increase             (5,500.00)         5,500.00 Salvage of Machine       65,000.00 PreTAx Labor cost savings            49,000.00           49,000.00       49,000.00 Depreciation          (41,250.00)        (56,250.00)     (18,750.00) Preatx Income                 7,750.00           (7,250.00)       30,250.00 Tax @35%            (2,712.50)             2,537.50     (10,587.50) Add Tax on Capital gain on Machine sale     (19,687.50) Post Tax Income               5,037.50           (4,712.50)             (25.00) Add Back Depreciation            41,250.00           56,250.00       18,750.00 Net Cash Flow (with NWC & Salvage)        (130,500.00)            46,287.50           51,537.50       89,225.00 PV factor @12%=                       1.00                     0.893                   0.797               0.712 PV of Cash flows        (130,500.00)            41,328.13           41,085.38       63,508.59 NPV =Sum of PV of cash flows= $        15,422.10 So Cash Flow at year 3= $89,225 NPV = $15,422.10. As the NPV is positive , the project can be accepted.

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