Problem 12-9 New project analysis You must evaluate a proposal to buy a new mill
ID: 2735165 • Letter: P
Question
Problem 12-9
New project analysis
You must evaluate a proposal to buy a new milling machine. The base price is $161,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $112,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,500 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 $53,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
A. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
$ ANSWER: 1815000,000
B. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent.
Year 1 $
Year 2 $
Year 3 $
* JUST NEED SOLUTIONS TO B I GOT A CORRECT can you please bold answers Thanks!
Explanation / Answer
Year
0
1
2
3
base price
-161000
Shipping and installation
-16000
Working capital
-4500
Answer 1
Initial investment
-181500
Sales value after 3 years
112700
Saving in labour cost post tax (1-tax rate )*53000
34450
34450
34450
Tax saving on depreciation
20444
27877.5
9292.5
Total cashflows
-181500
54894
62327.5
156443
Dis factor @10%
1
0.9091
0.82645
0.7513
Answer 2
Discounted cashflow
-181500
49903
51510.3
117538
Depreciation
0
1
2
3
Cost
-177000
Depreciation rates
33%
45%
15%
Depreciation
-58410
-79650
-26550
Tax saving @35%
-20444
-27878
-9293
Year
0
1
2
3
base price
-161000
Shipping and installation
-16000
Working capital
-4500
Answer 1
Initial investment
-181500
Sales value after 3 years
112700
Saving in labour cost post tax (1-tax rate )*53000
34450
34450
34450
Tax saving on depreciation
20444
27877.5
9292.5
Total cashflows
-181500
54894
62327.5
156443
Dis factor @10%
1
0.9091
0.82645
0.7513
Answer 2
Discounted cashflow
-181500
49903
51510.3
117538
Depreciation
0
1
2
3
Cost
-177000
Depreciation rates
33%
45%
15%
Depreciation
-58410
-79650
-26550
Tax saving @35%
-20444
-27878
-9293