finance

New project analysis You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500.
The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33, 45, 15, and 7 percent. The machine would require a $5,500 increase in working capital (increased inventory less increased accounts payable). There would be no effect on revenues,
but pre-tax labor costs would decline by $44,000 per year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

a. How should the $5,000 spent last year be handled?

b. What is the net cost of the machine for capital budgeting purposes, that is, the Year 0 project cash flow?

c. What are the net operating cash flows during Years 1, 2, and 3?

d. What is the terminal year cash flow?

e. Should the machine be purchased?

Explain your answer.

  1. 0
  2. 0
  3. 35
asked by linda

Respond to this Question

First Name

Your Response

Similar Questions

  1. finance

    New project analysis You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would

    asked by GARY on June 10, 2008
  2. Financial Management

    The management of cooper Equipment is planning to purchase a new milling machine that will cost 160,000 installed.The old machine has been fully depreciated but can be sold for 15,000. The new machine will be depreciated on a

    asked by Ruth on March 15, 2008
  3. FINANCIAL MANAGEMENT

    An interest rate( is it variable-relevant or fixed irrelevant for year 1,2,3,4?) of 11.5%, from a 4 years loan to buy a machine( will last 5 years) on the last day of the company'previous financial year , should it be allocated in

    asked by Doria on November 2, 2013
  4. BUSINESS

    Question What are the differences between an internal proposal and an external proposal? Also I need to summarize why the two proposal types are different in terms of the following elements: Consider the following scenario:

    asked by JOSE on May 26, 2009
  5. Com 135

    Consider the following scenario: Management at your project management firm wants to ensure staff members are fully trained on new technologies before planning, developing, and maintaining information technology projects for

    asked by Dawn on March 11, 2008
  6. Algebra 2 (Linear Programming)

    Part A requires 4 hours per unit on a lathe and 3 hours per unit on a milling machine. Part B requires 2 hours per unit on a lathe and 5 hours per unit on a milling machine. 52 hours are available on the lathe and 60 hours are

    asked by Peter on October 5, 2011
  7. Technology

    Please tell me if this is correct: 14. Which type of machine has a rotating tool cutting motion and a linear tool feed motion? a. milling machine b. drill press c. wood lathe d. scroll saw A?

    asked by y912f on January 19, 2010
  8. Finance - Capital Budgeting/Cost-cutting

    Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $210,000 in annual pre-tax cost savings. The press falls into Class 8

    asked by Jess on December 1, 2013
  9. Project Management

    Evaluating the Two Methods of Risk Analysis Explain how the results in both quantitative and qualitative analysis are used in both recommending moving forward with a project and planning a project. • Analyze and explain the

    asked by animal on October 5, 2008
  10. business project management

    what is a good website where I can go and a sample of a short proposal for a business project? http://sbinformation.about.com/cs/bizlettersamples/a/proposal.htm

    asked by dre on June 6, 2007

More Similar Questions