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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Hello,

Can you please help with this question? I must be done in EXCEL format and I need the formulas that used to arrive at the answers so that I get an understanding of what I need to do. Thank you 

**Answer to 12.9 (Problem 3)**

**New Project Analysis**

**Scenario:** You must evaluate a proposal to buy a new milling machine.

- **Base Price:** $135,000
- **Shipping and Installation Costs:** Additional $8,000
- **Depreciation:** Falls into the MACRS 3-year class with applicable rates of 33%, 45%, 15%, and 7%.
- **Resale Value after 3 years:** $94,500
- **Working Capital:** Requires a $5,000 increase in net operating working capital.
- **Cost Savings:** Pretax labor costs would decline by $52,000 per year.
- **Tax Rate:** Marginal tax rate is 35%.
- **Weighted Average Cost of Capital (WACC):** 8%
- **Feasibility Study Cost:** $4,500 spent last year.

**Questions:**
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.
Transcribed Image Text:**Answer to 12.9 (Problem 3)** **New Project Analysis** **Scenario:** You must evaluate a proposal to buy a new milling machine. - **Base Price:** $135,000 - **Shipping and Installation Costs:** Additional $8,000 - **Depreciation:** Falls into the MACRS 3-year class with applicable rates of 33%, 45%, 15%, and 7%. - **Resale Value after 3 years:** $94,500 - **Working Capital:** Requires a $5,000 increase in net operating working capital. - **Cost Savings:** Pretax labor costs would decline by $52,000 per year. - **Tax Rate:** Marginal tax rate is 35%. - **Weighted Average Cost of Capital (WACC):** 8% - **Feasibility Study Cost:** $4,500 spent last year. **Questions:** 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.
Expert Solution
steps

Step by step

Solved in 5 steps with 7 images

Blurred answer
Knowledge Booster
Balance Of Payment
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education