Question
Your company is considering expanding operations and buying a new machine to handle the increased volume. The machines basic price is $100,000, and it will
Your company is considering expanding operations and buying a new machine to handle the increased volume. The machines basic price is $100,000, and it will cost another $15,000 to modify it for special use by your firm. The machine falls into the MACRS three-year class, and it will be sold after three years for $15,000. Use of the machine will require an increase in net working capital (inventory) of $3,000. The machine will increase revenues by $50,000 per year, and is expected to increase annual costs by $5,000. The firm's marginal tax rate is 40 percent.
MACRS3: Year 1 = .33; Year 2 = .45; Year 3 = .15; Year 4 = .07
Please show the breakdown/ work for each question.
Question 1: What is the Cash Flow in year 1?
Question 2: What is the terminal (non-operating) cash flow at the end of Year 3?
Question 3: If the expansion project has a required rate of return of 9%, what is the NPV?
Question 4: What is the IRR?
Question 5: Should this expansion project be taken on? Why?
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