In: Finance
NEW PROJECT ANALYSIS
You must evaluate a proposal to buy a new milling machine. The base price is $163,000, and shipping and installation costs would add another $18,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,200. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,000 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 $57,000 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. Do not round your intermediate calculations.
Year 1 $
Year 2 $
Year 3 $
I.Sunk cost, Should not be included | |||
a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital | |||
=-163,000-18,000-3,000 | |||
(184,000) | since outflow | ||
b.Annual Cash Flows: | |||
Year 1 | 2 | 3 | |
Savings in Cost | 57,000 | 57,000 | 57,000 |
Less: Depreciation | 59,730 | 81,450 | 27,150 |
Net Savings | -2,730 | -24,450 | 29,850 |
Less: Tax @35% | -955.50 | -8,557.50 | 10,447.50 |
Income after Tax | -1,774.50 | -15,892.50 | 19,402.50 |
Add: Depreciation | 59,730 | 81,450 | 27,150 |
Operating Cash Flow | 57,955.50 | 65,557.50 | 46,552.50 |
Add: After tax salvage value | 46,814.50 | ||
Recovery of Working capital | 3,000 | ||
Additional cash flows | 49,814.50 | ||
Annual Cash flows | 57,955.50 | 65,557.50 | 96,367.00 |
Written down value | 12,670 | ||
Sale price | 65200 | ||
Gain on sale | 52,530 | ||
Tax | 18385.5 | ||
After tax salvage value | 46814.5 | ||
c.NPV = Present value of cash inflows – present value of cash outflows | |||
= 57955.50*PVF(14%, 1 year) + 65,557.50*PVF(14%, 2 years) + 96,367*PVF(14%, 3 years) – 184000 | |||
-17672.49451 | |||
No, should be purchased (since NPV is negative) |