Business, 02.12.2019 22:20 poweradampower

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 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 spend 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.

Answers: 2

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