Problem 12-9 New project analysis You must evaluate a proposal to buy a new mill
ID: 2764831 • Letter: P
Question
Problem 12-9
New project analysis
You must evaluate a proposal to buy a new milling machine. The base price is $175,000, and shipping and installation costs would add another $14,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $122,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,500 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 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
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.
$
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 $
Explanation / Answer
Ans:-Initial project cash flow=Machine cost + shipping and installation expenses + change in net working capital
= $175,000+ $14,000+$9500
=$198,500
CF1 = (revenues - costs)*(1 - tax rate)
= ( $198,500x45/100-53,000)* (1-35%)
=$1,891,325
CF2 =(revenues-costs)* (1- tax rate)
= ($ 198,500x15/100-53000)*(1-35%)
= $1.831,775
CF3=(revenues-costs)* (1-tax rate)
= ($198,500x7/100-53000)* (1-35%)
=$1815895