You are the head of finance department in XYZ Company. You are considering adding a new machine to your production facility. The new machineâs base price is $10,900.00, and it would cost another $1,970.00 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after three years for $2,150.00. The machine would require an increase in net working capital (inventory) of $680.00. The new machine would not change revenues, but it is expected to save the firm $33,085.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 32.00%.
1. If the project's cost of capital is 14.20%, what is the NPV of the project?
2. What is the initial cash outlay? (3 pts.)
3. What are the free cash flow for year 1? (3 pts)
4. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital â also called terminal value)?
EXPLAIN ALL ANSWERS AND SHOW ALL WORK
You are the head of finance department in XYZ Company. You are considering adding a new machine to your production facility. The new machineâs base price is $10,900.00, and it would cost another $1,970.00 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after three years for $2,150.00. The machine would require an increase in net working capital (inventory) of $680.00. The new machine would not change revenues, but it is expected to save the firm $33,085.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 32.00%.
1. If the project's cost of capital is 14.20%, what is the NPV of the project?
2. What is the initial cash outlay? (3 pts.)
3. What are the free cash flow for year 1? (3 pts)
4. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital â also called terminal value)?
EXPLAIN ALL ANSWERS AND SHOW ALL WORK
Related questions
Problem 11-6
New-Project Analysis
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,010,000, and it would cost another $24,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $668,000. The machine would require an increase in net working capital (inventory) of $14,000. The sprayer would not change revenues, but it is expected to save the firm $454,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.
What is the Year-0 net cash flow?
$
What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
$
If the project's cost of capital is 14 %, what is the NPV of the project? Round your answer to the nearest dollar.
$
