You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $143,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $94,500. The machine would require a $5,000 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 $52,000 per year. The marginal tax rate is 25%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. How should the $4,500 spent last year be handled? What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 project cash flow? What are the project’s annual cash flows during Years 1, 2, and 3? Should the machine be purchased? Explain your answer.
You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $143,000, and the equipment will be fully
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How should the $4,500 spent last year be handled?
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What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 project cash flow?
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What are the project’s annual cash flows during Years 1, 2, and 3?
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Should the machine be purchased? Explain your answer.
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