Aerospace Inc. is considering an acquisition of a machine. The machine costs $ 1.5 million and would cost another $120,000 to modify it for its customized use. This machine has an estimated service life of five years, with a salvage value of $450,000. With this machine, the firm will be able to generate additional revenues of $1.75 million. However, the machine requires a trained operator. This will entail $600,000 in annual labor, $200,000 in annual material expenses, and another $100,000 in annual overhead expenses. It also requires an investment in working capital in the amount of $250,000, which will be recovered in full at the end of year 5.

 The machine falls into MACRS seven-year class. Find the year-by-year after-tax net cash flow for the project at a 40% marginal tax rate and determine the net present value of the project at the company's cost of capital of 15%. 

 

Note: Assume that the asset is purchased in service at the beginning of year 1 (that is, at time 0) and that the first year's depreciation is claimed at the end of year 1. Also, assume half-year convention for depreciation. 

Answer rating: 100% (QA)

To calculate the yearbyyear aftertax net cash flow for the project and determine the net present value NPV we need to consider the costs revenues depreciation taxes and salvage value over the fiveyear ... View the full answer