You must assess a proposal to buy a new milling equipment., Ask an Expert

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You must evaluate a proposal to buy a new milling machine. The base price is $108,00, and shipping and installation costs would be another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 year for $65,000. The applicable depreciation rates are 33, 45, 15 and 7 percent. The machine would require a $5,500 increase in working capital. There would be no effect on revenues, but pre-tax labor costs would decline by $44,000 per year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm spent %5,000 last year investigating the feasibility of using the machine.

What is the net cost of the machine for capital budgeting purposes, that is, the Year 0 project cash flow?

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