In: Finance
You must evaluate a proposal to buy a new milling machine. The base price is $183,000, and shipping and installation costs would add another $7,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $91,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,500 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 $31,000 per year. The marginal tax rate is 35%, and the WACC is 13%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
What is the initial investment outlay for the machine for
capital budgeting purposes, that is, what is the Year 0 project
cash flow? Round your answer to the nearest cent.
$
What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.
Year 1 $
Year 2 $
Year 3 $
a
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -190000 | ||||||
Initial working capital | -6500 | ||||||
=b. Initial Investment outlay | -196500 | ||||||
3 years MACR rate | 33.00% | 45.00% | 15.00% | 7.00% | |||
Savings | 31000 | 31000 | 31000 | ||||
-Depreciation | =Cost of machine*MACR% | -62700 | -85500 | -28500 | 13300 | =Salvage Value | |
=Pretax cash flows | -31700 | -54500 | 2500 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | -20605 | -35425 | 1625 | |||
+Depreciation | 62700 | 85500 | 28500 | ||||
= after tax operating cash flow | 42095 | 50075 | 30125 | ||||
reversal of working capital | 6500 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 59475 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 4655 | |||||
=Terminal year after tax cash flows | 70630 | ||||||
c. Total Cash flow for the period | -196500 | 42095 | 50075 | 100755 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.13 | 1.2769 | 1.442897 | ||
Discounted CF= | Cashflow/discount factor | -196500 | 37252.21 | 39216.07 | 69828.269 | ||
NPV= | Sum of discounted CF= | -50203.44834 |
d
Reject project as NPV is negative