You must evaluate a proposal to buy a new milling machine. The base price is $182,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $63,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,500 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 $54,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. How should the $5,000 spent last year be handled? a. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. b. The cost of research is an incremental cash flow and should be included in the analysis. c. Only the tax effect of the research expenses should be included in the analysis. d. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. e. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations. Should the machine be purchased?
You must evaluate a proposal to buy a new milling machine. The base price is $182,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $63,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,500 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 $54,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. How should the $5,000 spent last year be handled? a. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. b. The cost of research is an incremental cash flow and should be included in the analysis. c. Only the tax effect of the research expenses should be included in the analysis. d. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. e. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations. Should the machine be purchased?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 4P
Related questions
Question
QC 57.
Transcribed Image Text:You must evaluate a proposal to buy a new milling machine. The
base price is $182,000, and shipping and installation costs would
add another $15,000. The machine falls into the MACRS 3-year
class, and it would be sold after 3 years for $63,700. The
applicable depreciation rates are 33%, 45%, 15%, and 7%. The
machine would require a $3,500 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 $54,000 per year. The marginal tax rate is
35%, and the WACC is 11%. Also, the firm spent $5,000 last year
investigating the feasibility of using the machine.
How should the $5,000 spent last year be handled?
a. Last year's expenditure is considered as a sunk cost and does
not represent an incremental cash flow. Hence, it should not be
included in the analysis.
b. The cost of research is an incremental cash flow and should
be included in the analysis.
c. Only the tax effect of the research expenses should be
included in the analysis.
d. Last year's expenditure should be treated as a terminal cash
flow and dealt with at the end of the project's life. Hence, it
should not be included in the initial investment outlay.
e. Last year's expenditure is considered as an opportunity cost
and does not represent an incremental cash flow. Hence, it
should not be included in the analysis.
What are the project's annual cash flows during Years 1, 2, and
3? Round your answer to the nearest cent. Do not round your
intermediate calculations.
Should the machine be purchased?
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