Capital Budgeting
Not what you're looking for?
The Johnson Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,500 to modify it for special use. The machine falls into the MACRS 3-year class, and would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of
$5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before tax operating costs, mainly labor. Johnson's marginal tax rate is 35%.
What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)
What are the net operating cash flows in Years 1,2,and 3?
What is the additional (nonoperating)cash flow in Year 3?
If the project's cost of capital is 12%, should the machine be purchased?
Show the equation so I can understand how to do it correctly. Thanks a lot for all of your help.
Purchase this Solution
Solution Summary
The solution explains the calculation of the cash flows and the accept/reject decision for the project
Purchase this Solution
Free BrainMass Quizzes
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.