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# Capital Budgeting- Proposed acquisition of equipment

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The Progresso Company is evaluating the proposed acquisition of a new milling machine. The machine's price is \$100,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$45,000. The machine would require an increase in net working capital (inventory) of \$10,000. The machine would have no effect on revenues, but it is expected to save the firm \$50,000 per year in before-tax operating costs, mainly labor. Progresso's marginal tax rate is 40%.

What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)
What is the net operating cash flow in Year 1?
What is the net operating cash flow in Year 2?
What is the net operating cash flow in Year 3?
What is the terminal year cash flow (year 4 when the machine is sold)?
If the project's cost of capital is 10%, what is the project's net present value (NPV)?

#### Solution Preview

The Progresso Company is evaluating the proposed acquisition of a new milling machine. The machine's price is \$100,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$45,000. The machine would require an increase in net working capital (inventory) of \$10,000. The machine would have no effect on revenues, but it is expected to save the firm \$50,000 per year in before-tax operating costs, mainly labor. Progresso's marginal tax rate is 40%.

What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)

Cost of new machine: \$100,000
Increase in working capital= \$10,000
Total= \$110,000

Therefore, initial investment oulay in year 0= \$110,000

What is the net operating cash flow in Year 1?
What is the net operating cash flow in Year 2?
What is the net operating cash flow in Year 3?

Net operating ...

#### Solution Summary

Calculates the cash flows and net present value of a project.

\$2.19