Your company is considering expanding operations and buying a new machine to handle the increased volume. The machine’s basic price is $100,000, and it will cost another $15,000 to modify it for special use by your firm. The machine falls into the MACRS three-year class, and it will be sold after three years for $15,000. Use of the machine will require an increase in net working capital (inventory) of $3,000. The machine will increase revenues by $50,000 per year, and is expected to increase annual costs by $5,000. The firm's marginal tax rate is 40 percent.
MACRS3: Year 1 = .33; Year 2 = .45; Year 3 = .15; Year 4 = .07
Please show the breakdown/ work for each question.
1. What is the Cash Flow in year 1?
2. What is the terminal (non-operating) cash flow at the end of Year 3?
3. If the expansion project has a required rate of return of 9%, what is the NPV?
4. What is the IRR?
5. Should this expansion project be taken on? Why?