Question
You must evaluate a proposal to buy a new milling machine. The base price is $120,000, and shipping and installation costs would add another $15,000.
You must evaluate a proposal to buy a new milling machine. The base price is $120,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $70,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $6,000 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 $46,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. What is the initial year 0 cash flow for the milling machine?
A. | -$140,000 | |
B. | -$146,000 | |
C. | -$135,000 | |
D. | -$126,000 | |
E. | -$141,000 |
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