Question
You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000.
You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $52,000 per year. The marginal ta rate is 35% and the WACC is 8%.
a) What is the depreciation expense for Year 2?
b) What is the cash flow in Year 2?
c) What is the terminal cash flow at time t=3, given that the book value in year 4 is $10,010
d) What is the projects NPV?
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