FN312_Mini Case: Chapters 9&10 STAMPING MACHINE PURCHASE RECOMMENDATION The CFO of Montag Metals is considering the purchase of a new stamping machine to support its sales growth. The firm has hired you to determine whether it will be a good idea to pursue this project. The new machine will allow the firm to increase annual revenues by $3,500,000. Annual cash costs will increase by $2,000,000. In addition, the firm will need to immediately increase inventory by $500,000. Accounts payable will partly offset this, increasing by $350,000. The new stamping machine costs $4,500,000 installed. It will be depreciated by MACRS method for 3-year property. The expected economic life of the machine is five years. At the end of five years the machine will likely be sold for about 20% of its initial cost. The firms tax rate is 40%. The CFO also asks you to prepare a report recommending whether the firm should go forward with the investment or not. In preparing your recommendation, you should create a spreadsheet to carefully detail the following calculations: a) The initial investment in the project. b) The operating cash flows over the project life. c) The (non-operating) terminal cash flow for this project. d) The projects internal rate of return and its net present value (NPV) at the firms cost of capital of 12%. e) Recommendation Montag Metals Exercise
	Years
Initial Investment	0
New Equipment
Net Working Capital Investment
Initial Investment
Operating Cash Flows Over the Project Life		1	2	3	4	5
Revenues
- Costs
- Depreciation Expense (3 year MACRS)
EBIT
-Taxes @ 40%
Operating Income after Tax
+ Depreciation Expense
OCF
Terminal Cash Flow						5
Salvage Value
Tax @ 40%
Salvage Value after Tax
Net Working Capital Return
Terminal Cash Flow
NPV Analysis	0	1	2	3	4	5
Project Cash Flows
Discount rate @ 12%	0.12
Net Present Value (=sum of present values)
Internal Rate of Return
Cumulative Project Cash Flows
Payback Period