HT Tool Co is considering the purchase of a new CNC machine. This project is not expected to change sales, but should save the firm in labor costs. The labor savings is expected to be $46,000 (before tax). The machine costs $110,000. It will require $14,000 in modifications to support the needs of HT Tool. An increase in inventory (net working capital) of $6,500 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 11%
Begin with a blank worksheet and show your setup:
- What is the terminal (NOT operating) cash flow in year 3?
- What are the NPV and IRR for this project?
- Should be accepted?