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Capital Budgeting decisions

You have been asked by the president of your company to evaluate the proposed acquisition of a new hydropropolaser for the R&D department. The price for this equipment is $70,000, and it would cost another $14,000 to modify it for special use by your firm. The hydropropolaser, which has a MACRS 3-year recovery period (wts. 33%, 45%, 15%, 7%) would be sold after 3 years for $30,000. Use of this equipment would require an increase in net working capital of $11,000. The hydropropolaser would have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 36%.

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1. What is the initial net investment for the machine (CF0)?
Price of machine $70,000.00
modification $14,000.00
increase in net working capital $11,000.00
Initial Net Investment for machine $95,000.00

1. Project is completed after sale of Machinery that is after 3 years
2. There is no capital gain tax

2. What are the net operating ...

Solution Summary

This explains the concept of capital budgeting decision with the help of NPV through analysis of case and step by step explanation.