FIN 6020 Capital Budgeting v19s HT Tool Company HT Tool Co is considering the purchase of a new CNC milling machine to enhance the quality of its custom fabrication services. This project is not expected to change sales, but should save the firm in labor costs. The annual labor savings is expected to be $74,350 (before tax) but the machine will use more electrical power, which is expect to cost $2,400 each year. The machine costs $145,000. It will require $21,000 in modifications to support the needs of HT Tool. An increase in inventory (net working capital) of $5,150 will be necessary. • The machine will be depreciated using MACRS with a 3-year class life (half-year convention). • The firm's tax rate is 35%. • The plan is to sell the machine after 3 years and the expected selling price then is estimated at $65,000. • The hurdle rate for this project is 10.5% Begin with a blank unused worksheet and show your setup: a. What is the initial investment of this project? (Year O net cash flow). b. What are the net operating cash flows for years 1, 2, and 3? c. What is the terminal (NOT operating) cash flow in year 3? d. What are the NPV and IRR for this project? e. Should be accepted?
FIN 6020 Capital Budgeting v19s HT Tool Company HT Tool Co is considering the purchase of a new CNC milling machine to enhance the quality of its custom fabrication services. This project is not expected to change sales, but should save the firm in labor costs. The annual labor savings is expected to be $74,350 (before tax) but the machine will use more electrical power, which is expect to cost $2,400 each year. The machine costs $145,000. It will require $21,000 in modifications to support the needs of HT Tool. An increase in inventory (net working capital) of $5,150 will be necessary. • The machine will be depreciated using MACRS with a 3-year class life (half-year convention). • The firm's tax rate is 35%. • The plan is to sell the machine after 3 years and the expected selling price then is estimated at $65,000. • The hurdle rate for this project is 10.5% Begin with a blank unused worksheet and show your setup: a. What is the initial investment of this project? (Year O net cash flow). b. What are the net operating cash flows for years 1, 2, and 3? c. What is the terminal (NOT operating) cash flow in year 3? d. What are the NPV and IRR for this project? e. Should be accepted?
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
Related questions
Question
I need help figuring out question D. It is highlighted. Attached is what I have
![**Machine Cost and Financial Overview**
- **Machine Cost**: $145,000
- **Modifications**: $21,000
- **Annual Labor Savings**: $74,350
- **Electric Power Cost**: $2,400 each year
**Initial Investment Calculation**
Initial Investment is calculated as follows:
- Cost of machine
- Modification cost
- Increase in net working capital
\[ 145,000 + 21,000 + 5,150 = 171,150 \]
**Operating Cash Flow Analysis**
Year-by-year breakdown of savings, costs, and depreciation:
| **Year** | **1** | **2** | **3** |
|----------|--------|--------|--------|
| **Saving in labor cost** | 74,350 | 74,350 | 74,350 |
| **Additional power cost** | -2,400 | -2,400 | -2,400 |
| **MACRS depreciation rate** | 33.33% | 44.45% | 14.81% |
| **Less: Depreciation** | 55,327.8 | 73,787 | 24,584.6 |
| **EBIT** | 16,622.2 | -1,837 | 47,365.4 |
| **Less: Tax at 35%** | 5,817.77 | -642.95 | 16,577.89 |
| **EAT** | 10,804.43 | -1,194.05 | 30,787.51 |
| **Add: Depreciation** | 55,327.8 | 73,787 | 24,584.6 |
| **Operating Cash Flow** | $66,132.23 | $72,592.95 | $55,372.11 |
**Terminal Cash Flow Analysis**
Year 1 to 3 breakdown including book values, salvage values, and taxes:
| **Year** | **1** | **2** | **3** |
|----------|-------|-------|-------|
| **Book Value of machine** | 110,672.2 | 36,885.2 | 12,300.6 |
| **Salvage value of machine** | - | - | 65,000 |
| **Tax on gain** | - | - | -18,](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa0a43d2b-9546-4d41-a578-d063425f347b%2Fd39cb774-28d7-4cc4-ade6-0c94d9f49e24%2Fbkibgqu_processed.png&w=3840&q=75)
Transcribed Image Text:**Machine Cost and Financial Overview**
- **Machine Cost**: $145,000
- **Modifications**: $21,000
- **Annual Labor Savings**: $74,350
- **Electric Power Cost**: $2,400 each year
**Initial Investment Calculation**
Initial Investment is calculated as follows:
- Cost of machine
- Modification cost
- Increase in net working capital
\[ 145,000 + 21,000 + 5,150 = 171,150 \]
**Operating Cash Flow Analysis**
Year-by-year breakdown of savings, costs, and depreciation:
| **Year** | **1** | **2** | **3** |
|----------|--------|--------|--------|
| **Saving in labor cost** | 74,350 | 74,350 | 74,350 |
| **Additional power cost** | -2,400 | -2,400 | -2,400 |
| **MACRS depreciation rate** | 33.33% | 44.45% | 14.81% |
| **Less: Depreciation** | 55,327.8 | 73,787 | 24,584.6 |
| **EBIT** | 16,622.2 | -1,837 | 47,365.4 |
| **Less: Tax at 35%** | 5,817.77 | -642.95 | 16,577.89 |
| **EAT** | 10,804.43 | -1,194.05 | 30,787.51 |
| **Add: Depreciation** | 55,327.8 | 73,787 | 24,584.6 |
| **Operating Cash Flow** | $66,132.23 | $72,592.95 | $55,372.11 |
**Terminal Cash Flow Analysis**
Year 1 to 3 breakdown including book values, salvage values, and taxes:
| **Year** | **1** | **2** | **3** |
|----------|-------|-------|-------|
| **Book Value of machine** | 110,672.2 | 36,885.2 | 12,300.6 |
| **Salvage value of machine** | - | - | 65,000 |
| **Tax on gain** | - | - | -18,
Transcribed Image Text:**FIN 6020 - Capital Budgeting v19s**
**HT Tool Company**
HT Tool Co is considering the purchase of a new CNC milling machine to enhance the quality of its custom fabrication services. This project is not expected to change sales, but should save the firm in labor costs. The annual labor savings is expected to be $74,350 (before tax) but the machine will use more electrical power, which is expected to cost $2,400 each year. The machine costs $145,000. It will require $21,000 in modifications to support the needs of HT Tool. An increase in inventory (net working capital) of $5,150 will be necessary.
- The machine will be depreciated using MACRS with a 3-year class life (half-year convention).
- The firm’s tax rate is 35%.
- The plan is to sell the machine after 3 years and the expected selling price then is estimated at $65,000.
- The hurdle rate for this project is 10.5%.
Begin with a **blank unused** worksheet and show your setup:
a. What is the **initial investment** of this project? (Year 0 net cash flow).
b. What are the **net operating** cash flows for years 1, 2, and 3?
c. What is the **terminal** (NOT operating) cash flow in year 3?
d. What are the **NPV and IRR for this project?**
e. Should be accepted?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education