The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $95,000, and it would cost another $91,000 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $69,000. The machine would require an 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 $38,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
a) What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)
b) What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Year 1
Year 2
Year 3
c) What is the additional Year 3 cash flow (that is, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.