Question
Right after graduation, you got a job as the assistant financial manager of a regional bike manufacturing company. The company is considering to purchase a
Right after graduation, you got a job as the assistant financial manager of a regional bike manufacturing company. The company is considering to purchase a new machinery that will make the production of tires more efficient. And, your boss has asked you to provide an assessment for a proposed acquisition. The machinerys basic price is $70,000, and it would cost an additional $15,000 to modify it so that it is ready to be used for bike tires. The machinery falls into the MACRS 3-year class. Your boss is planning to sell it after 3 years for $30,000. The MACRS rates for the first 3 years are 0.3333, 0.4445, and 0.1481. Use of the machinery would require an increase in net working capital of $4,000. The machine would not generate any additional revenues; however, it is expected to provide savings of $25,000 per year in before-tax operating costs. The firms marginal federal-plus-state tax rate is 40%.
Part 1. Calculate the Year-0 cash flow.
Part 2. Calculate the operating cash flows in Years 1, 2, and 3.
Part 3. Calculate the additional cash flow in Year 3 from net working capital.
Part 4. Calculate the additional cash flow in Year 3 from the after-tax salvage value.
Part 5. If the projects cost of capital is 10%, should the new machinery be purchased?
Right after graduation, you got a job as the assistant financial manager of a regional bike manufacturing company. The company is considering to purchase a new machinery that will make the production of tires more efficient. And, your boss has asked you to provide an assessment for a proposed acquisition. The machinerys basic price is $70,000, and it would cost an additional $15,000 to modify it so that it is ready to be used for bike tires. The machinery falls into the MACRS 3-year class. Your boss is planning to sell it after 3 years for $30,000. The MACRS rates for the first 3 years are 0.3333, 0.4445, and 0.1481. Use of the machinery would require an increase in net working capital of $4,000. The machine would not generate any additional revenues; however, it is expected to provide savings of $25,000 per year in before-tax operating costs. The firms marginal federal-plus-state tax rate is 40%.
Part 1. Calculate the Year-0 cash flow.
Part 2. Calculate the operating cash flows in Years 1, 2, and 3.
Part 3. Calculate the additional cash flow in Year 3 from net working capital.
Part 4. Calculate the additional cash flow in Year 3 from the after-tax salvage value.
Part 5. If the projects cost of capital is 10%, should the new machinery be purchased?
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