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NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $135,000, and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. 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 35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 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.

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

Solutions

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 $135,000, and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. 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 35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.

  1. a. How should the $4,500 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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Chapter 12 Solutions

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