Question
Baldwin Company is considering an investment project. The company will use an existing factory currently valued at $150,000. The company will buy a machine priced
Baldwin Company is considering an investment project. The company will use an existing factory currently valued at $150,000. The company will buy a machine priced at $100,000 (depreciated according to MACRS 5-year: 20%, 32%, 19.20%, 11.52%, and 11.52%). The machine has a salvage value of $30,000. Other expenses are as follows:
- An initial increase in NWC is $10,000.
- Production (in units) by year during the 5-year life of the machine: 5,000, 8,000, 12,000, 10,000, 6,000.
- Price-per-unit during the first year is $20; price increases 2% per year thereafter.
- Production costs during first year are $10 per unit and increase 10% per year thereafter.
- Working Capital: initial $10,000 changes with sales
- NWC at the end of each year equals 10% of sales that year.
- Baldwins tax rate is 21%.
- Baldwins cost of capital is 10%.
Should the company accept the project? Why? Please complete the Capital Budgeting table below:
Baldwin Companys Capital Budgeting Table
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
|
Sales Revenue
Operating Costs
Taxes OCF
CF of Investment
IATCF
ANSWER
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