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problem: You must estimate a proposal to purchase a new milling machine. The base price is dollar 108,000, and shipping and installation price would add another dollar 12,500. The machine falls into the MACRS three year class, and it would be sold after three years for dollar 65,000. The applicable depreciation rates are 33, 45, 15, and 7 percent as discussed in Appendix 12A. The machine would require a dollar 5,500 increase in working capital [increased inventory less increased accounts payable]. There would be no effect on revenues, but pre-tax labor costs would decline by dollar 44,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent dollar 5,000 last years investigating the feasibility of using the machine.

[A] How should the $5,000 spent last year be handled?

[B] find out the net cost of the machine for capital budgeting purposes, that is, the Year 0 project cash flow?

[C] Determine the net operating cash flows during Years 1, 2, & 3?

[D] find out the terminal year cash flow?

[E] Should the machine be purchased? describe.

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