Your company is considering acquiring a new machine. The base price of the machine is $235,000. It would cost $25,000 more to install the machine and make appropriate customizations. The accounting department said these costs can be depreciated in a straight-line manner based on an economic life for the machine of 5 years. After 3 years the machine will be sold for $120,000. Purchasing this machine would require an increase in net working capital of $12,500. The machine would have no effect on revenues, but would likely save the company $75,000 per year in before-tax operating costs. The company's marginal tax rate is 40%.
1. What is the Year 0 (initial) cash flow?
2. What are the net operating cash flows during the life of the project (Years 1, 2 and 3)?
3. What is the end-of-project cash flow (i.e., the after-tax salvage and the return of working capital)?
4. If the project's cost of capital is 9%, should the machine be purchased?