You must evaluate a proposal to buy a new milling machine. The base price is $108,000, a installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and after 3 years for $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The require a $5,500 increase in working capital (increased inventory less increased accounts payab be no effect on revenues, but pretax labor costs would decline by $44,000 per year. The margina and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using t What are the project's annual net cash flows during Years 0 through 3?

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
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PROBLEM 1. New Project
You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and
installation costs would add another $12,500. The machine 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%. The machine would
require a $5,500 increase in working capital (increased inventory less increased accounts payable). There would
be no effect on revenues, but pretax labor costs would decline by $44,000 per year. The marginal tax rate is 35%,
and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
What are the project's annual net cash flows during Years 0 through 3?
Transcribed Image Text:PROBLEM 1. New Project You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine 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%. The machine would require a $5,500 increase in working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $44,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. What are the project's annual net cash flows during Years 0 through 3?
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