Problem:
The Campbell Company is ev aluation the proposed acquistion of a new milling machine. The machine's base price is $108,000, and it would cost another $12,500 to modify it for special use by your firm. The machine falls into the MACRS 3-years class, and it would be sold after 3 years for $65,000. The machine would require and increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35 percent.
Q1. What is the net cost of the machine for capital budgeting purposes? ( That is, what is the Year 0 net cash flow?)
Q2. What is the year 0 net cash flow?
Q3. What is the terminal year chash flow?
Q4. If the project's cost of capital is 12 percent, should the machine be purchased?