1. You have been tasked by your manager to evaluate the efficacy of purchasing a special piece of machinery to meet anticipated future demand. The machine will cost $100,000 installed with a four-year life and zero salvage value. Investment in net working capital will total $20,000. Sales will increase to $200,000 per year over the four years and zero thereafter, as the product will be discontinued. Operating expenses will increase by $140,000 for the four years. The machine will be depreciated using the 3-year MACRS (33.3, 44.5, 14.8, 7.4). Your company tax rate is 34% and the MARR is 15%.

a) What is the CFo (initial outlay) for this project?

b) What are the annual cash flows in years 1-4?

c) What are the terminal cash flows associated with this project?

2.

2.

a) What is the CFo (initial outlay) for this project?

b) What is the terminal cash flow associated with this project?
 

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CURRENT MACHINE Purchased Two Years Ago Purchase Price $120,000 Depreciation using 5-year MACRS (20, 32, 19.2, 11.52, 11.52, 5.76) Salvage Value $37,600 NEW (REPLACEMENT) MACHINE $180,000 $7,500 $15,000 Cost Shipping Facilities Modification Depreciation using 5-year MACRS (20, 32, 19.2, 11.52, 11.52, 5.76) Change in Net Working Capital $10,000 $30,000 $12,000 $8,000 Will increase revenues by Will decrease expenses by Salvage Value at end of six years Company tax rate 34% MARR 10% CURRENT MACHINE Purchased Two Years Ago Purchase Price $120,000 Depreciation using 5-year MACRS (20, 32, 19.2, 11.52, 11.52, 5.76) Salvage Value $37,600 NEW (REPLACEMENT) MACHINE $180,000 $7,500 $15,000 Cost Shipping Facilities Modification Depreciation using 5-year MACRS (20, 32, 19.2, 11.52, 11.52, 5.76) Change in Net Working Capital $10,000 $30,000 $12,000 $8,000 Will increase revenues by Will decrease expenses by Salvage Value at end of six years Company tax rate 34% MARR 10%

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