You must evaluate a proposal to buy a new milling machine. The base price is $200,000,...

You must evaluate a proposal to buy a new milling machine. The base price is $200,000, and shipping and installation costs would add another $7000. The machine falls into the MACRS 3-year class,and it would be sold after 3 years for $120,000. The applicable depreciation rates are 33,45,15, and 7 percent. The machine would require a $10,000 increase in working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pre-tax labor costs would decline by $45,000 per year. The marginal tax rate is 35 percent, and the WACC is 13 percent. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

a. How should the $5,000 spent last year be handled?

b. What is the net cost of the machine for capital budgeting purposes, that is, the year 0 project cash flow?

c. What are the net operating cash flows during Years 1,2,and 3?

d. Should the machine be purchased?

Expert Solution

jeff jeffy answered 4 months ago

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