(11–6)

New-Project Analysis The Campbell Company is evaluating the proposed acquisition of a new milling machine.

The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%.

a. What is the net cost of the machine for capital budgeting purposes?

(That is, what is the Year-0 net cash flow?)

b. What are the net operating cash flows in Years 1, 2, and 3?

Chapter 11: Cash Flow Estimation and Risk Analysis 459

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?

d. If the project’s cost of capital is 12%, should the machine be purchased?