CellU, a subsidiary of CompU, is looking to replace one of the machines they use to manufacture cell phones with new, more efficient model. the current machine cost $7,500, is three years old, and is depreciated using the MACRS 3-year recovery period. The current machine could be sold now for $1,000, but at the end of 3 years, it would be worthless. The cost of the new machine is $11,500, installation costs are $500, and would require an increase in net working capital of $1,000. The expected life of the new machine is 3 years, is depreciated using the MACRS 3-year recovery period, and will reduce annual labor expenses from $10,000 to $4,000. At the end of the project, the firm will be able to sell the new machine for $3,000 and recover their investments in net working capital. The firm has a marginal tax rate of 40 percent.
a) Calculate the initial investment of the new machine. Show your work.
b) Calculate the annual incremental operating cash flows for the new machine. Show your work.
c) Calculate the terminal value of the new machine. Show your work.