A Company Is Evaluating The Purchase Of A Machine To Improve Product Quality And Output Levels The New Machine Would Co 1 (37.65 KiB) Viewed 35 times
A Company Is Evaluating The Purchase Of A Machine To Improve Product Quality And Output Levels The New Machine Would Co 2 (51.66 KiB) Viewed 35 times
A Company Is Evaluating The Purchase Of A Machine To Improve Product Quality And Output Levels The New Machine Would Co 3 (9.27 KiB) Viewed 35 times
A company is evaluating the purchase of a machine to improve product quality and output levels. The new machine would cost $811,000 and would be depreciated for tax purposes using the straight-line method over an estimated six-year life to its expected salvage value of $50,000. The new machine would require an addition of $45,000 to working capital at the beginning of the project, which will of course be returned to the firm at the end of the project. The machine would increase the company's annual pre-tax cash receipts by $247,000 from their current level. Cash operating costs pertaining to the machine will be $17,000 per year. In addition, at the end of the 4th year, a major repair of the machine costing $30,000 (pre- tax) would be required. The company has an overall cost of capital of 11%, and is in the 35% marginal tax bracket. Required: A. Prepare a cash flow spreadsheet that identifies and summarizes the incremental cash flows for each year of the machine's life. B. Calculate the machine's net present value. C. Calculate the machine's internal rate of return. D. Based on your analysis, should the firm purchase the machine? THE
A B Purchase of machine Annual cash revenues Annual cash costs Major repair Depreciation Earnings before tax Income tax Net Income Add back depreciation Working capital investment Sale of machine Net cash flow Net cash flow from above Present value factors Present value Net present value Time Zero Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
CIRR using Excel or calculator D Double click and put your answer here.
Join a community of subject matter experts. Register for FREE to view solutions, replies, and use search function. Request answer by replying!