CAPITAL BUDGETING Falcon Airlines, Inc. As owner of Falcon Airlines, you are con

Question

CAPITAL BUDGETING Falcon Airlines, Inc. As owner of Falcon Airlines, you are considering the purchase of a new de-icing machine. The machine will be used to remove ice from the wings of Falcon’s planes during winter. The new machine will cost $98,000, shipping costs of $2,000, and also will require $3,000 in working capital to support the new machine’s operation. The equipment will be depreciated over a 3-year period using MACRS and will have an expected salvage value of $4,000 at the end of its expected economic life of four years. The annual savings associated with the machine are expected to be $25,000 per year for the next four years. The company will not deduct the salvage value from the machine’s cost when calculating depreciation. The existing de-icing machine is one year old but is not adequate for the company’s needs; it can be sold today for $40,000. The equipment was purchased for $60,000 and was being depreciated over a three-year period using the MACRS method. Falcon uses a hurdle rate of 11% for its capital budgeting projects and has a marginal tax rate of 30%. Determine whether you should purchase the new de-icing machine.

Explanation / Answer

Depreciation = MACRS % x Investment

Cash Flows = Investment + NWC + Profits + Depreciation + Salvage x (1 - tax)

NPV = NPV(rate = 11%, CF1...CF4) + CF0 = -20,342.43

As NPV < 0, Falcon should not purchase the machine.

Falcon 0 1 2 3 4 MACRS 33.33% 44.45% 14.81% 7.41% Investment -100,000 NWC -3,000 3,000 Salvage 4,000 Savings 25,000 25,000 25,000 25,000 Depreciation -33,330 -44,450 -14,810 -7,410 EBT -8,330 -19,450 10,190 17,590 Tax (30%) 2,499 5,835 -3,057 -5,277 Profits -5,831 -13,615 7,133 12,313 Cash Flows -103,000 27,499 30,835 21,943 25,523 NPV -$20,342.43

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.