Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is

Question:

Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $120,000, and it would cost another $9,500 to modify it for special use. The machine falls into Class 8 with a 20% CCA rate, and it would be sold after 4 years
for $60,000. The machine would require an increase in net working capital (inventory) of $7,500. The milling machine would have no effect on revenues, but it is expected to save the firm $31,000 per year in before-tax operating costs, mainly labour. Campbell's marginal tax rate is 30%.

a. What is the total initial investment for capital budgeting purposes? (That is, what is the Time 0 net cash flow?)

b. What is the PV of the project cash flows using an 11% cost of capital?

c. What is the PV of the CCA tax shield?

d. What is the PV of the additional Year 4 cash flow?

e. If the project's cost of capital is 11%, should the machine be purchased?

Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

Fantastic news! We've Found the answer you've been seeking!