Dayman Inc. has asked you to evaluate a proposal to buy a new costume machine. T

Question

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 initial investment outlay for the machine? Round answers to nearest dollar. You must show your work to receive full credit

Explanation / Answer

Base price $ (110,000) Installation cost $   (15,000) Increase in working capital $      (5,500) Initial investment $ (130,500)

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