New project analysis You must evaluate a proposal to buy a new milling machine. The
base price is $108,000, and shipping and installation costs would add another $12,500.
The machine falls into the MACRS 3-year class, and it would be sold after 3 years for
$65,000. The applicable depreciation rates are 33, 45, 15, and 7 percent as discussed in
Appendix 12A. The machine would require a $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 $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.
A. What are the projects annual cash flows during years 1, 2 and 3?
B. Should the machine be purchased? Explain your answer
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