Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. A company is evaluating the proposed acquisition of a new machine. The machine's base price is $108,000, and it would cost another $12,500 to

image text in transcribed
1. A company is evaluating the proposed acquisition of a new machine. The machine's base price is $108,000, and it would cost another $12,500 to modify it for special use. Depreciation rates are 0.33, 0.45, and 0.15 for years 1, 2, and 3, respectively, 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 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. The company'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- O net cash flow?) (6 pts) b. What are the net operating cash flows in Years 1, 2, and 3? (7 pts) c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? (6 pts) d. If the project's cost of capital is 12%, should the machine be purchased? (6 pts)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Codes Of Finance

Authors: Vincent Antonin Lépinay

1st Edition

0691151504, 978-0691151502

More Books

Students also viewed these Finance questions