You have been asked to evaluate the proposed acquisition of a new Machine for your company. The machines basic price is $150,000.

Assume that the machine can be depreciated using straight line over three years.

The Machine would require an increase in net working capital (spare parts inventory) of $8,000 at the start of the project. This working capital will be recovered at Year 3.

The machine would have no effect on revenues, but it is expected to save the firm $52,000 per year in before tax operating costs. This machine will help the firm reduce its labor costs.

Assume that the firms marginal tax rate is 28%.

a) If the cost of capital (WACC) is 10%, should the machine be purchased?

b) What is the minimum cost savings required to justify the purchase of this machine?

Equipment cost Installation charge Economic Life Salvage Value Tax Rate Cost of Capital NOWC Cost Savings each year \begin{tabular}{|c|c|c|c|} \hline Year end & \% Depreciation & Depreciation Amount & Tax Savings \\ \hline 1 & & & \\ \hline 2 & & & \\ \hline 3 & & & \\ \hline \end{tabular} Cost Savings Year 0 Year 2 Year 3 - Tax After Tax Cost Savings Tax saving from Depreciation Operating Cash Flow Long Term Assets Operating Cash Flows CF due to investment in NWC Net Cash Flows PV of Cash flows NPV (Value of Project) ==>