The Ritchie Company is evaluating the proposed acquisition of a new milling machine. The machine' base price is $180,000, and it would cost another $25,000 to modify it for special use by your firm. The machine has a MACRS 3-year recovery period, and it would be sold after 3 years for $80,000. The machine would require an increase in net working capital (inventory) of $7,500. The machine would have no effect on revenues, but it is expected to save the firm $75,000 per year in before-tax operating costs, mainly labor. Ritchies marginal tax rate is 34%.

a. What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)

b. What are the operating cash flows in Years 1, 2, and 3?

c. What is the terminal cash flow in Year 3?

If the projects cost of capital is 10%, should the machine be purchased?