1 2 3 0 (10 points) Name: Your firm has a weighted average cost of capital (WACC) of 10 percent, a 26 percent tax rate and is considering a machine that has an initial cost of $140,000, but additional modifications must be made at a cost of $30,000. The machine has a 3-year economic life and will save the firm $60,000 per year. It the machine is purchase net operating working capital (NOWC) will increase by $8,000, but may be totally recovered at the project's termination. The machine will be depreciated using the MACR 3-year class life with half-year convention. Thus, there will be a remaining adjusted basis in year 3 when the project is terminated and the machine is sold for $60,000. Terminal Cash Flows must include the taxes on the sale of the machine in year 3. The Initial Cash Flows, Operating Cash Flows and Terminal Cash Flows are given. Determine the NPV for the project (the cash flows are already determined for you) and the IRR for the project. Depreciation Schedule:3-year class life, assuming half year convention Initial Basis 170,000 Year Dep Rate Depreciation dj Basis 0.33 56,100 113,900 0.45 76,500 37,400 0.15 25,500 11,900 0.07 11.900 Luitial Cash Flow = 0: CAPEX is total initial capital cost and ANOWC is the net increase in working coital Price -$140,000 Modification -30.000 CAPEX -$170,000 NOWC -8.000 Initial investment outlay -$178.000 Machine's onerating cash flows: Year CERT Depreciation Taxable income Taxes 60,000 56,100 3,900 1014 58,986 60,000 76,500 -16,500 60,000 3 60,000 25,500 34,500 3,600 56,400 Operating losses may be carried forward, thus taxes in year 3 are: ($34,500-S16,500)*0.26=$3,600 *0.26 Machine's Terminal cash flows at = 3: Salvage value Tax on salwe wlue Recovery of NOWC CEAT $60,000 12,506** 8,000 55,494 **Tax on Salvage = (Salvage value-Adjusted Basis)0.26=($60,000 - $11,90090.26= $12,506 NPV= IRR- Should your firm purchase or reject the new machine? 1 2 0