Question
Toyota wants to evaluate the purchase of a proposed machine for the outdoor equipment. The purchase price of the parts totals $2,000,000, and they need
Toyota wants to evaluate the purchase of a proposed machine for the outdoor equipment. The purchase price of the parts totals $2,000,000, and they need to spend $650,000 on the equipment to put it into functional use. The equipment has a useful life of 5 years, and it will be depreciated using the straight-line method. The equipment would require an $62,000 increase in net operating working capital. The project would have no effect on revenues, but it should save them $1,650,000 per year in before-tax labor costs. Their marginal federal-plus-state tax rate is 25%. The equipment has $268,000 salvage value whenever they decide to dispose of the machine. Toyota plans to sell off the at the end of the 4th year of the project.
a. What is the initial investment outlay for the machine, that is, what is the Year 0 project cash flow?
b. What are the projects annual cash flows in Years 1, 2, 3 & 4?
c. If the WACC is 11%, should the machine be purchased? Explain.
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