Question

Consider the following financial information about a new machine at a computer manufacturing company:

• The machine costs $150,000 and will be used for 4 years.
• The machine will be depreciated using MACRS 5-year class property.
• At the end of the fourth year, the machine will be sold at 40% of the initial cost.
• The firm will invest $20,000 in working capital (fully recoverable at the end of the project life).
• The expected annual savings on labor and materials due to the new machine are $60,000 in year 1, and they will increase by $5,000 every year thereafter.
• Operating and maintenance costs are $22,000 annually.
• The firm will finance 40% of the machine money from an outside financial institution at an interest rate of 10%. The firm is required to repay the loan with 4 equal annual payments.
• The firm’s tax rate is 40%.
• The firm’s MARR is 15%.

With the above information, compute the present worth for this project. Is this a good investment? Why? Explain your answer clearly.

Show all your calculations and explain every step. Always use factor notation.

Complete the income and cash flow statements. You need to submit both statements plus all the calculations involved in the numbers you introduce in these statements.

You can find tables for the statements on the next page, but I hope you have prepared them beforehand.

Income Statement
	0	1	2	3	4
Revenues		60.000	65.000	70.000	75.000
Expenses	150.000
O&M		22.000	22.000	22.000	22.000
Depreciation
Debt Interest
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
	0	1	2	3	4
Operating Activities
Net Income
Depreciation
Investment Activities
Investment
Salvage Value
Gains Tax
Working capital
Financing Activities
Borrowed Funds
Principal Payment
Net Cash Flow

Answer 1