You have been asked by the president of your company to evaluate the proposed acquisition of a new machine. The company spent $10,000 to survey the market whether the new machine would be effective in production. The machine’s basic price is $60,000, and it will cost another $20,000 to install. The employees are supposed to obtain a training session before operating the machine, costing $5,000. The machine can be sold after four years for $8,000. Use of the machine will require an increase in account receivables by $5,000, a decrease in inventory by $5,000, and an increase in account payables by $10,000. The machine is expected to increase the sales revenue by $6,000, but it is expected to save the firm $10,000 per year in operating costs, mainly labor. To acquire this new machine, the firm would have to borrow $20,000 at 10% interest from its local bank, resulting in interest payments of $2,000 per year. The machine falls into the 4-year straight-line method for depreciation. The firm’s marginal tax rate is 40%. Assume the required rate of return is 10%.
(a) What is the initial outlay associated with this project?
(b) What is the operating cash flow per year?
(c) What is the terminal cash flow?
(d) Find the NPV. Should the machine be purchased? Explain.