The Ewert Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use by the firm. The machine falls into the MACRS 3-year class, and it would be sold after three years for $65,000. 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 $44,000 per year in before-tax operating costs (excluding depreciation), mainly labor. Ewert’s marginal tax rate is 34 percent.
a. What is the initial investment outlay of the machine for capital budgeting purposes?
b. What are the supplemental operating cash flows in Years 1, 2, and 3?
c. What is the terminal cash flow in Year 3?
d. If the firm’s required rate of return is 12 percent, should the machine be purchased?