Capital Budgeting Exercise 1

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $500 initially, and then $150 per year in maintenance costs. Machine B costs $650 initially, has a life of three years, and requires $100 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 10% and the tax rate is zero.

Year	0	1	2	3
Machine As Cash Flows
Machine Bs Cash Flows

Machine As EAC
Machine Bs EAC

Which machine do you choose?

Capital Budgeting Exercise 2

Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $300,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $25,000. The machine has an expected life of 3 years, a $50,000 estimated resale value, and falls under the MACRS 7-Year class life. Revenue from the new game is expected to be $400,000 per year, with costs of $150,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 10 percent, and it expects net working capital to increase by $75,000 at the beginning of the project. Should you proceed with this project? Explain.

Year	0	1	2	3
Sales
Fixed Costs
Depreciation
EBIT
Taxes
Net Income

Operating Cash Flow
Change in NWC
Change In Fixed Assets
Total Cash Flow

Should you proceed with this project? Explain.