Question $3(20$ points$)$:

The Foundry is looking to purchase a new machine that has a purchase price of $$5,000,000,$ an MACRS class life of $5$ years and an estimated sale price of $$300,000$ at the end of year $3.$ The new machine would be sold at the end of its useful life $($at the end of year $3).$ The new machine is expected to increase revenues by $$500,000$ per year and increase fixed and variable costs by $$200,000$ per year. The company will incur working capital requirements which include a one$-$time increase in inventory of $$100,000,$ reversing the entry for NWC at the end of the project.

The Company's tax rate is $30\%$ and its company$$s required return is $10\%.$

Question: Should the Foundry buy the machine? $($Show calculations to support your answer$)$

MACRS schedule for $5-$year class life:

Year $123456$

$20\%32\%19\%12\%11\%6\%$

$($a$)$ Calculate the tax savings from depreciation

Depreciation Expense Year $1$ Year $2$ Year $3$

Depreciation Expense $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Tax Savings$*\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$($b$)$

Cash Flows Year $0$ Year $1$ Year $2$ Year $3$

Investment $\_\_\_\_\_\_\_\_$

After tax Net Operating Income $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Dep$$n Tax Savings$*\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$($from part $($a$))$

Net Working Capital $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Net Salvage New Machine $\_\_\_\_\_\_\_\_\_$

Net Cash Flow $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$($c$)$

NPV of Project: $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$($d$)$

Purchase$/$Do Not Purchase: $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$