The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machines base price is $ 108,000, and it would cost another $ 12,500 to modify it for special use. The machine falls into the MACRS 3- year class, and it would be sold after 3 years for $ 65,000. The machine would require an increase in 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. Campbells marginal tax rate is 35%. 10% = WACC. (Three-Year MACRS Schedule: 33% 45% 15% 7%).
a. What is the initial investments? (what is the Year 0 net cash flow?)
b. What are the net operating cash flows in Years 1, 2, and 3?
c. What is the terminal cash flow from disposal of all assets tied up in this project?
d. What is NPV if this machine is expected to save the after-tax cash flows of the company’s another product line by $10,000 per year?