In: Finance
NEW PROJECT ANALYSIS
You must evaluate a proposal to buy a new milling machine. The base price is $125,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $62,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,500 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 $49,000 per year. The marginal tax rate is 35%, and the WACC is 10%. 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 | -140000 | ||||||
Initial working capital | -4500 | ||||||
=b. Initial Investment outlay | -144500 | ||||||
3 years MACR rate | 33.00% | 45.00% | 15.00% | 7.00% | |||
Savings | 49000 | 49000 | 49000 | ||||
-Depreciation | =Cost of machine*MACR% | -46200 | -63000 | -21000 | 9800 | =Salvage Value | |
=Pretax cash flows | 2800 | -14000 | 28000 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 1820 | -9100 | 18200 | |||
+Depreciation | 46200 | 63000 | 21000 | ||||
=after tax operating cash flow | 48020 | 53900 | 39200 | ||||
reversal of working capital | 4500 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 40625 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 3430 | |||||
=Terminal year after tax cash flows | 48555 | ||||||
c. Total Cash flow for the period | -144500 | 48020 | 53900 | 87755 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | ||
Discounted CF= | Cashflow/discount factor | -144500 | 43654.54545 | 44545.4545 | 65931.6304 | ||
d. NPV= | Sum of discounted CF= | 9631.63 |