In: Finance
You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $111,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $59,000. The machine would require an $8,000 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 $55,000 per year. The marginal tax rate is 25%, and the WACC is 11%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.
A: IV
This is treated as sunk cost since the amount so spent does not impact the cash flows of the project. Other options hence are irrelevant.
B: Initial outlay = Purchase cost*(1-Tax) (Since it is fully depreciated)
= 111000*(1-25%)
= 83250
C: Annual cash flows
Year 1= 41250
Year 2= 41250
Year 3 = 93500
4: Yes
Since NPV is positive at 47757.98
Workings