Question
1. One year ago, HQ Company paid $10,000 to a consultant to review some new milling machines. Now,thecompanyisevaluatingtheacquisitionofanewmillingmachine. Themachinesbaseprice is $108,000, and it would cost
1. One year ago, HQ Company paid $10,000 to a consultant to review some new milling machines. Now,thecompanyisevaluatingtheacquisitionofanewmillingmachine. Themachinesbaseprice is $108,000, and it would cost another $12,500 to modify it for special use by the firm. The machine falls into the MACRS 3-year class (Annual depreciation rates will be provided in the exam), and it willbesoldafter3yearsfor$65,000. Themachinewouldrequireanincreaseinnetworkingcapital (inventory)of$5,500inthebeginning. Themillingmachinewouldhavenoeffectonrevenues,but it is expected to save the firm $36,000 per year (= revenues costs = gross profit = GP) in before- tax operating costs, mainly labor. The annual interest expense is $4,000. HQs marginal tax rate is 25%. a. Calculate the net cost of the machine for capital budgeting purposes. (i.e., what is the Year 0 net cash flow, CF0?) b. Calculate the (net) operating cash flows (OCF) in Years 1, 2, and 3. c. Calculate the after-tax salvage value (ATSV). d. Calculate the terminal (year) cash flow. e. If the projects cost of capital is 12%, should the machine be purchased?
a. CF0= Initial Cost + NOWC CF
= Initial Cost + (OCA+OCL)
= (-$108,000+-$12,500) + (-$5,500--$4,000)
= -$120500 + -$1,500 = -$122,000
b. OCF
c. ATSV
d. Terminal CF
e.
3. Also, your boss, who is curious about how the depreciation method matters, asks you to estimate the NPV (for the project in Question 1), using the straight-line depreciation method over a 4-year period (the life of the machine). Compare the NPV in Question 1 and the NPV in Question 3 and make comments.
This is the answers I got for number one I need help with number 3 please!!
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