Question
In: Finance
Tundra Tots is evaluating the proposed acquisition of new equipment at a cost of $250,000. In...
Tundra Tots is evaluating the proposed acquisition of new equipment at a cost of $250,000. In addition the equipment would require modifications at a cost of $20,000 plus shipping costs of $3,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $25,000. The equipment would require increased inventory of $4,000. The equipment is expected to save the company $25,000 per year in before-tax operating costs. The company's marginal tax rate is 30 percent and its cost of capital is 11 percent.
a. What is the cash outflow at Time 0?
b. What are the net operating cash flows in years 1, 2, and 3?
c. Calculate the non-operating terminal year cash flow.
d. Calculate net present value. Should the machine be purchased?
PLEASE SHOW WORK IN EXCEL IF POSSIBLE, THANK YOU
Solutions
Expert Solution
Part a.
Net Cash Outflow at time 0 = Cost of machine $25000 + shipping $3000 + modification $20000 + increase in inventory $4000
Net Cash Outflow at time 0 = $277,000
Part b, c, d refer the image above
Yes the machine should be purchases since NPV is positive $15323.38.
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