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Scott Brothers Company (SBC) is contemplating the production of a new type of hand-held manufacturing device....

Scott Brothers Company (SBC) is contemplating the production of a new type of hand-held manufacturing device. A consultant was paid $15,000 last year to perform a feasibility study for this new device. The firm has an existing facility they can use for this potential project, but the facility can also be rented for $30,000 per year for the next 3 years by another company that is in negotiations concerning a lease. The new machinery needed for SBC’s new project has a purchase price of $600,000, an installation cost of $10,000, an estimated useful life of 3 years, and an estimated salvage value of $75,000 to be received at the end of the useful life of the machinery. The project is expected to provide an annual increase in net revenues of $180,000 to SBC. An additional $20,000 in inventory and an additional $12,000 in accounts payable will be required during the period of the project. The IRS categorizes this type of machinery as a MACRS 3-year class for depreciation purposes (percentage for years 1-4 are 33%, 45%, 15%, and 7%, respectively). The company is in the 40 percent federal-plus-state tax bracket, and it has a 12 percent discount rate.

  1. What is the initial net cash outflow (NICO) required if the new machine is installed? (2 pts)
  2. Compute all of the annual operating cash flows for this project. (4 pts)
  3. What is the end-of-project or terminal cash flow? You do not need to include the operating cash flow in this calculation. (3 pts)
  4. If the firms cost of capital was 8%, what would be the NPV of this project? Is it acceptable? (2 pts)

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jeff jeffy answered 1 year ago
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