1. A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated as a 7-year class MACRS asset. The firm's marginal tax rate is 40%. What are the annual net cash flows associated with the purchase of this machine? Also compute the net investment (NINV) for this project.
2. Nguyen, INC. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new system will be depreciated under the MACRS rules applicable to 7-year class assets. If the ICX is purchased, the old system will be sold for $20,000. The ICX system, which has a useful life of 10 years, is expected to increase revenues by $32,000 per year over its useful life. Operating costs are expected to decrease by $2,000 per year over the life of the system. The firm is taxed at a 40 percent marginal rate.
a. What net investment is required to acquire the ICX system and replace the old system?
b. Compute the annual net cash flows associated with the purchase of the ICX system.
3. Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $100,000. A new building will cost $100,000 and will be depreciated on a straight-line basis over 20 years to a salvage value of $0. Actual land salvage at the end of 20 years is expected to be $200,000. Actual building salvage at the end of 20 years is expected to be $150,000. Equipment for the facility is expected to cost $250,000. Installation costs will be an additional $40,000 and shipping costs will be $10,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage of the year of 20 years is $0. The project will require net working capital of $70,000 initially (year 0), an additional $40,000 at the end of year 1, and an additional $40,000 at the end of year 2. The project is expected to generate increased EBIT (operating income) for the firm of $100,000 during year 1. Annual EBIT is expected to grow at a rate of 4 percent per year until the project terminates at the end of year 20. The marginal tax rate is 40%. Compute the initial net investment and the annual net cash flow from the project in year 20.