The Campbell Company is evaluating the proposed acquisition of a new milling mac
ID: 2772263 • Letter: T
Question
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $95,000, and it would cost another $91,000 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $69,000. The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $38,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
a) What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)
b) What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Year 1
Year 2
Year 3
c) What is the additional Year 3 cash flow (that is, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
Explanation / Answer
a)NEt cash flow in year 0 = net cost of machine + working capital
= ( 95,000 +91,000 ) + 5,500
= 186,000 + 5,500
= $ 191,500
b)
7200 (tax saving )
3)Additional year 3 cash flow = 52434.78(after tax salvage) + 5500 (working capital )
=$ 57934.78
**Book value after year 3 = 186000 * 7.41% = $ 13782.60
**sale value = 69000
capital gain = 69000 - 13782.60 = $ 55217.40
capital gain tax= 55217.40 *30% = $ 16565.22
net sale proceeds /after tax salvage value = 69000 - 16565.22 = $ 52434.78
year 1 2 3 saving due to machine 38,000 38,000 38,000 less depreciation [cost =186000 ] (62,000) [186000*33.33%] (82677) [186000*44.45%] (27546.60) [186000*14.81%] net savings - 24000 - 44677 10453.40 less:Tax @ 30%7200 (tax saving )
13403.1 (tax savings ] (3136.02) Income after tax - 16800 - 31273.90 7317.38 Add:Depreciation (non cash ) 62,000 82,677 27,546 .60 net cash flow 45200 51403.10 34863.98