11-9.

New Project Analysis

Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $120,000, and it would cost another $9,500 to modify it for special use. The machine falls into Class 8 with a 20% CCA rate, and it would be sold after 4 years for $60,000. The machine would require an increase in net working capital (inventory) of $7,500. The milling machine would have no effect on revenues, but it is expected to save the firm $31,000 per year in before-tax operating costs, mainly labour. Campbell's marginal tax rate is 30%.

1.What is the total initial investment for capital budgeting purposes? (That is, what is the Time 0 net cash flow?)

2.What is the PV of the project cash flows using an 11% cost of capital?

3.What is the PV of the CCA tax shield?

4.What is the PV of the additional Year 4 cash flow?

5.If the project's cost of capital is 11%, should the machine be purchased?

Could you help me solve this problem and show me all steps?