12-9 NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,000 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 $52,000 per year. The marginal tax rate is 35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 spent last year be handled? b. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? c. What are the project's annual cash flows during Years 1, 2, and 3? d. Should the machine be purchased? Explain your answer.
12-9 NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,000 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 $52,000 per year. The marginal tax rate is 35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 spent last year be handled? b. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? c. What are the project's annual cash flows during Years 1, 2, and 3? d. Should the machine be purchased? Explain your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Can you please help me to solve this problem using EXCEL spreadsheet and please show all Excel formulas used for each section. Thank you
Transcribed Image Text:ANSWER TO 12.9 (PROBLEM 3) THIS HAS FOUR PARTS (A, B, C, & D)
Prob1
Prob2
Prob3
Prob4
Prob5
12-9
NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The
base price is $135,000 and shipping and installation costs would add another $8,000. The
machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500.
The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A.
The machine would require a $5,000 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 $52,000 per year. The marginal tax rate is 35%, and the WACC
is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.
a. How should the $4,500 spent last year be handled?
b. What is the initial investment outlay for the machine for capital budgeting purposes,
that is, what is the Year 0 project cash flow?
c. What are the project's annual cash flows during Years 1, 2, and 3?
d. Should the machine be purchased? Explain your answer.
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