1. The machines base price is $108,000, and it would cost another $12,500 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Campbells marginal tax rate is 35%.

1. What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year-0 net cash flow?)
2. What are the net operating cash flows in Years 1, 2, and 3?
3. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?
4. If the projects cost of capital is 12%, should the machine be purchased?

MACRS 3-year class Depreciation

YEAR 1 33%

YEAR 2 44%

YEAR 3 15%