Answered: You must evaluate a proposal to buy a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 4P

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Question

You must evaluate a proposal to buy a new milling machine. The base price is $101,000, and shipping and installation costs would add another $12,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $45,450. 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 $52,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $4,500 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? Enter your answer as a positive value. Round your answer to the nearest cent.
$
What are the project's annual cash flows during Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest cent.
Year 1: $
Year 2: $
Year 3: $

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