You have been hired to evaluate a new chocolate machine at Wonka Inc. The purchase price of the chocolate machine including modifications is $280,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $80,000. The machine would require a $30,000 increase in net operating working capital. There would be no effect on revenues, but pretax labor costs would decline by $77,000 per year (i.e., Savings = $77,000 per year). The firms marginal federal-plus-state tax rate is 25%.

What is the initial investment outlay for the chocolate machine after bonus depreciation is considered (i.e., what is the Year 0 project cash flow)?

What are the projects annual cash flows in Years 1, 2, and 3?

If the WACC is 10%, should the chocolate machine be purchased? Explain.

(No Excel)