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
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I need help figuring out question D. It is highlighted. Attached is what I have
Transcribed Image Text:Machine Cost = $145,000
Modifications = $21,000
Annual Labor Savings = $74,350
Electric Power Cost = $2400 each year
Initial Investment = Cost of machine + modification cost + increase in net working capital = $171,150
145,000+21,000+5,150
$171,150
Operating Cash Flow
Year
1
2
3
Saving in labor cost
74350
74350
74350
Additional power cost
-2400
-2400
-2400
MACRS depreciation rate
33.33%
44.45%
14.81%
Less: Depreciation
55327.8
73787
24584.6
ЕBIT
16622.2
-1837
47365.4
Less: Tax at 35%
5817.77
-642.95
16577.89
EAT
10804.43
-1194.05
30787.51
Add: Depreciation
55327.8
73787
24584.6
Operating Cash Flow
S66,132.23
$72,592.95
$5,372.11
Terminal Cash Flow
Year
1
2
3
Book Value of machine
110672.2
36885.2
12300.6
Salvage value of machine
Tax on gain
65000
-18444.79
Salvage value net of tax
46555.21
Recovery of NWC
5150
Terminal cash flow
51705.21
NPV
IRR
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 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?
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