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New purchase

Please solve the problems below and share your solution in this discussion thread. Please provide your detailed calculations (either pasted into your response directly or as an attachment in Excel). Note that the goal of this discussion is to benefit from peer learning on the calculations. If you don't know the answer, please give it your best attempt and post your solution. (Your grade on the discussion is related your effort and contribution to the discussion and is not dependent on having solved the problem correctly initially.)

Your company is considering acquiring a new machine. The base price of the machine is $235,000. It would cost $25,000 more to install the machine and make appropriate customizations. The accounting department said these costs can be depreciated in a straight-line manner based on an economic life for the machine of 5 years. After 3 years the machine will be sold for $120,000. Purchasing this machine would require an increase in net working capital of $12,500. The machine would have no effect on revenues, but would likely save the company $75,000 per year in before-tax operating costs. The company's marginal tax rate is 40%.

  1. What is the Year 0 (initial) cash flow?
  2. What are the net operating cash flows during the life of the project (Years 1, 2 and 3)?
  3. What is the end-of-project cash flow (i.e., the after-tax salvage and the return of working capital)?
  4. If the project's cost of capital is 9%, should the machine be purchased?

Please explain, and show formula, on how you got answers.....

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