You must evaluate a proposal to buy a new milling machine. The base price is $18

Question

You must evaluate a proposal to buy a new milling machine. The base price is $182.000, and shipping and installation costs would add another $13, 000. The machine fals into the MACKS 2-year class, and it would be sold after 3 years for $91, 000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,500 increased in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenue but labor costs would decline by $44, 000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. How should the $5,000 spent last year be handled? What is the initial investment outlay for the machine for capital budgeting process 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. Should the machine be purchased?

Explanation / Answer

Ans) a. IV Last year's expenditure is consider a sunk cost does not represent and incremental cash flow. Hence should not included on the analysis b. $                                               195,000 Basice price of the Machine $                                                 182,000 Shipping and installation $                                                   13,000 $                                                 195,000 C. Year-1 $                                         46,475 Year-2 $                                         49,019 Year-3 $                                         66,953 Particulars Year-1 Year-2 Year-3 Total Total Cost of the investment $        195,000 Labour Cost saving $                                         44,000 $                                                   44,000 $            44,000 Less:- Tax Saving on Cash Labour Cost $                                      (15,400) $                                                 (15,400) $          (15,400) $                                         28,600 $                                                   28,600 $            28,600 Add:-Tax Saving on Depreciation $                                         22,523 $                                                   30,713 $            10,238 (64350*0.35) Gain on the Salvage of the Machinery $            50,278 Present value @10% 0.91 0.83 0.75 Total Cash flow $                                         51,123 $                                                   59,313 $            89,115 Dicounted Cash flow $                                         46,475 $                                                   49,019 $            66,953 $        162,447 NPV $        (32,553) Depreciation Calculation Year Book Value depreciation Depreciation 0 $                                      195,000 1 $                                      195,000 33 $            64,350 2 $                                      195,000 45 $            87,750 3 $                                      195,000 15 $            29,250 $          181,350 Book Value $       (195,000) Net book value $          (13,650) Amount realized $            91,000 Gain on sale of Machinery $            77,350 Tax payment 35% $          (27,073) Net gain after tax $            50,278 d. Reject the new Machinery As, the NPV of the Machinety is loss of $32,553

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