In: Finance
You must evaluate a proposal to buy a new milling machine. The
purchase price of the...
You must evaluate a proposal to buy a new milling machine. The
purchase price of the milling machine, including shipping and
installation costs, is $134,000, and the equipment will be fully
depreciated at the time of purchase. The machine would be sold
after 3 years for $73,000. The machine would require a $9,000
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 $40,000 per year. The
marginal tax rate is 25%, and the WACC is 12%. Also, the firm spent
$4,500 last year investigating the feasibility of using the
machine.
- How should the $4,500 spent last year be handled?
- Last year's expenditure should be treated as a terminal cash
flow and dealt with at the end of the project's life. Hence, it
should not be included in the initial investment outlay.
- Last year's expenditure is considered an opportunity cost and
does not represent an incremental cash flow. Hence, it should not
be included in the analysis.
- Last year's expenditure is considered a sunk cost and does not
represent an incremental cash flow. Hence, it should not be
included in the analysis.
- The cost of research is an incremental cash flow and should be
included in the analysis.
- Only the tax effect of the research expenses should be included
in the analysis.
- What is the initial investment outlay for the machine for
capital budgeting purposes after the 100% bonus depreciation is
considered, that is, what is the Year 0 project cash flow? Enter
your answer as a positive value. Round your answer to the nearest
dollar.
$
- What are the project's annual cash flows during Years 1, 2, and
3? Do not round intermediate calculations. Round your answers to
the nearest dollar.
Year 1: $
Year 2: $
Year 3: $
- Should the machine be purchased?