26 Jul WHAT ARE THE PROJECTS ANNUAL CASH FLOWS DURING YEARS 1 2 AND 3?
You must evaluate a proposal to buy a new milling machine. The bas Show more Problem 12-9 New project analysis You must evaluate a proposal to buy a new milling machine. The base price is $142000 and shipping and installation costs would add another $18000. The machine falls into the MACRS 3-year class and it would be sold after 3 years for $63900. The applicable depreciation rates are 33% 45% 15% and 7%. The machine would require a $5000 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 $54000 per year. The marginal tax rate is 35% and the WACC is 14%. Also the firm spent $5000 last year investigating the feasibility of using the machine. How should the $5000 spent last year be handled? Last years expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence it should not be included in the analysis. The cost of research is an incremental cash flow and should be included in the analysis. Only the tax effect of the research expenses should be included in the analysis. Last years expenditure should be treated as a terminal cash flow and dealt with at the end of the projects life. Hence it should not be included in the initial investment outlay. Last years expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence it should not be included in the analysis. What is the initial investment outlay for the machine for capital budgeting purposes that is what is the Year 0 project cash flow? Round your answer to the nearest cent. $ What are the projects annual cash flows during Years 1 2 and 3? Round your answer to the nearest cent. Year 1 $ Year 2 $ Year 3 $ Should the machine be purchased? Show less
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