You must evaluate a proposal to buy a different milling tool.?

The base price is $108,000, and shipping and installation costs would add another $12,500. The tool 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 wealth (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 closing year investigating the feasibility of using the machine.

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

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

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

d. What is the terminal year dosh flow?

e. Should the machine be purchased?

Explain your answer.
Answers:
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