Question

Question 13 3 pts 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 MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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. Should the machine be purchased? HTML Editore BIYA - A - I E II 1XX, SE VX 60 DI 12pt Paragraph O words

Answer 1

Based on the given data, pls find below steps, workings and answer:

The NPV of the project is positive and is $ 25149.59 ; Hence, this project (machine) is recommended for investment.

Year 1 Year 2 Year 3 Year 4 Terminal Year Project ($) Cost of Machine Shipping & Installation Total Capitalised Cost Salvage Value Net Working Capital Change in NWC Year 0 1,08,000 12,500 1,20,500 65,000 5,500 5,500 5,500 5,500 5,500 5,500 -5,500 44,000 44,000 44,000 44,000 65,000 Savings in Labour Costs Capital Gains Depreciation Depreciation - MACRS EBIT Tax @ 35% Net Income 39,765 33.00% 4,235 1,482 2,753 54,225 45.00% -10,225 -3,579 -6,646 18,075 15.00% 25,925 9,074 16,851 8,435 7.00% 35,565 12,448 23,117 65,000 22,750 42,250 Cash Flows (Net Income + Depreciation+ Change in NWC) Discounting Factor Discounted Cash Flow Cumulative Discounted Cash Flow -1,26,000 1 -1,26,000 -1,26,000 42,518 0.8929 37,962 -88,038 47,579 0.7972 37,929 -50,108 34,926 0.7118 24,860 -25,248 31,552 0.6355 20,052 -5,196 47,750 0.6355 30,346 25,150 NPV 25,149.59 Discounting Factor 12.00%

factor% are considered same.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;