Question
The Foundry is looking to purchase a new machine that has a purchase price of $5,000,000, an MACRS class life of 5 years and an
The Foundry is looking to purchase a new machine that has a purchase price of $5,000,000, an MACRS class life of 5 years and an estimated sale price of $300,000 at the end of year 3. The new machine would be sold at the end of its useful life (at the end of year 3). The new machine is expected to increase revenues by $500,000 and decrease costs by $200,000 per year. The company will incur working capital requirements which include a one-time increase in inventory of $100,000 and an increase in accounts payable of $150,000, reversing the entry for NWC at the end of the project.
The Company's tax rate is 34% and its companys required return is 12%.
Question: Should the Foundry buy the machine? (Show calculations to support your answer)
MACRS schedule for 5-year class life:
Year 1 2 3 4 5 6
20% 32% 19% 12% 11% 6%
(a) Calculate the tax savings from depreciation
Depreciation Expense Year 1 Year 2 Year 3
Depreciation Expense ________ ________ ________
Tax Savings* ________ ________ ________
(b)
Cash Flows Year 0 Year 1 Year 2 Year 3
Investment ________
After tax Net Operating Income ________ ________ ________
Depn Tax Savings* ________ ________ ________
(from part (a))
Net Working Capital ________ _________
Net Salvage New Machine _________
Net Cash Flow ________ _______ ________ ________
(c)
IRR of Project: ________________
(d)
Purchase/Do Not Purchase: __________________
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