1. Burton, a manufacturer of snowboards, is considering adding a more sophisticated machine. The following information is given.
The proposed machine will cost $120,000 and have installation costs of $15,000. It will be depreciated using a 5 year MACRS recovery schedule. It can be sold for $10,000 after five years of use (at the end of year 5).
The incremental earnings before taxes and depreciation (EBITDA) are projected to be:
Year 1: 43,000, Year 2: 45,000, Year 3: 46,000, Year 4: 49,000, Year 5: 53,000
Burton pays 34 percent taxes on ordinary income and capital gains.
They expect a large increase in sales so their Net Working Capital will increase by $20,000.
The maximum payback period allowed is 4 years.
They are currently using a WACC of 14% to evaluate investment projects.
a. Calculate the initial investment required for this project
b. Determine the incremental after-tax operating cash flows
c. Find the terminal cash flow for the project
d. Find the Payback period, NPV, IRR, and MIRR.
e. Should the new machine be purchased? Why or why not?