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NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACKS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,500 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 $44,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. a. How should the $5,000 spent last year be handled? b. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? c. What are the project’s annual cash flows during Years 1, 2, and 3? d. Should the machine be purchased? Explain your answer.

BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 12, Problem 9P
Textbook Problem

NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACKS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,500 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 $44,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

  1. a. How should the $5,000 spent last year be handled?
  2. b. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow?
  3. c. What are the project’s annual cash flows during Years 1, 2, and 3?
  4. d. Should the machine be purchased? Explain your answer.

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