In: Finance
NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $164,000, and shipping and installation costs would add another $17,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $82,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,500 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 $51,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
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Continue without saving |
a
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -181000 | ||||||
Initial working capital | -6500 | ||||||
=b. Initial Investment outlay | -187500 | ||||||
3 years MACR rate | 33.00% | 45.00% | 15.00% | 7.00% | |||
Savings | 51000 | 51000 | 51000 | ||||
-Depreciation | =Cost of machine*MACR% | -59730 | -81450 | -27150 | 12670 | =Salvage Value | |
=Pretax cash flows | -8730 | -30450 | 23850 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | -5674.5 | -19792.5 | 15502.5 | |||
+Depreciation | 59730 | 81450 | 27150 | ||||
=c. after tax operating cash flow | 54055.5 | 61657.5 | 42652.5 | ||||
reversal of working capital | 6500 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 53300 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 4434.5 | |||||
=Terminal year after tax cash flows | 64234.5 | ||||||
Total Cash flow for the period | -187500 | 54055.5 | 61657.5 | 106887 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.12 | 1.2544 | 1.404928 | ||
Discounted CF= | Cashflow/discount factor | -187500 | 48263.83929 | 49152.982 | 76080.055 | ||
NPV= | Sum of discounted CF= | -14003.12386 |
d.
Reject project as NPV is negative