In: Finance
You must evaluate a proposal to buy a new milling machine. The base price is $192,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $134,400. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $8,500 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 $46,000 per year. The marginal tax rate is 35%, and the WACC is 13%. 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 $
a
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -208000 | ||||||
Initial working capital | -8500 | ||||||
=b. Initial Investment outlay | -216500 | ||||||
3 years MACR rate | 33.00% | 45.00% | 15.00% | 7.00% | |||
Savings | 46000 | 46000 | 46000 | ||||
-Depreciation | =Cost of machine*MACR% | -68640 | -93600 | -31200 | 14560 | =Salvage Value | |
=Pretax cash flows | -22640 | -47600 | 14800 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | -14716 | -30940 | 9620 | |||
+Depreciation | 68640 | 93600 | 31200 | ||||
=c. after tax operating cash flow | 53924.00 | 62660.00 | 40820 | ||||
reversal of working capital | 8500 | ||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 5096 | |||||
=Terminal year after tax cash flows | 13596 | ||||||
Total Cash flow for the period | -216500 | 53924 | 62660 | 54416 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.13 | 1.2769 | 1.442897 | ||
Discounted CF= | Cashflow/discount factor | -216500 | 47720.354 | 49071.971 | 37713.018 | ||
NPV= | Sum of discounted CF= | -81994.66 |
d
Reject project as NPV is negative