Question
You have been asked to evaluate the proposed acquisition of a new machine. The machine's price is $1,000,000 and our accountant requires that it be
You have been asked to evaluate the proposed acquisition of a new machine. The machine's price is $1,000,000 and our accountant requires that it be written off over its 5-year class using straight-line depreciation to a book value of $0 even though we intend to keep it for only 3 years. Purchase of the machine would require an increase in net working capital of $20,000 at t=0 only. The machine would increase the firms before-tax revenues by $100,000 per year as well. It is expected to be used for 3 years and then be sold for $800,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 18 percent.
A. What is the net investment required at t=0?
B. What are the operating cash flows each year?
C. What is the total value of the ending (non-operating) cash flow in year 3?
D. what is the projects NPV?
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