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 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.© BrainMass Inc. brainmass.com October 9, 2019, 10:31 pm ad1c9bdddf
The solution explains the calculation of the cash flows and the accept/reject decision for the project