In: Finance
NEW PROJECT ANALYSIS
You must evaluate a proposal to buy a new milling machine. The
base...
NEW PROJECT ANALYSIS
You must evaluate a proposal to buy a new milling machine. The
base price is $113,000, and shipping and installation costs would
add another $20,000. The machine falls into the MACRS 3-year class,
and it would be sold after 3 years for $45,200. The applicable
depreciation rates are 33%, 45%, 15%, and 7%. The machine would
require a $10,000 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
$49,000 per year. The marginal tax rate is 35%, and the WACC is
11%. Also, the firm spent $5,000 last year investigating the
feasibility of using the machine.
- How should the $5,000 spent last year be handled?
- Last year's expenditure should be treated as a terminal cash
flow and dealt with at the end of the project's life. Hence, it
should not be included in the initial investment outlay.
- Last year's expenditure is considered as an opportunity cost
and does not represent an incremental cash flow. Hence, it should
not be included in the analysis.
- Last year's expenditure is considered as a sunk cost and does
not represent an incremental cash flow. Hence, it should not be
included in the analysis.
- The cost of research is an incremental cash flow and should be
included in the analysis.
- Only the tax effect of the research expenses should be included
in the analysis.
- 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 $ ________
-
Should the machine be purchased?