You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $52,000 per year. The marginal tax rate is 35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. 1. How should the $4,500 spent last year be handled? 2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? 3. What are the project’s annual cash flows during Years 1, 2, and 3? 4. Should the machine be purchased? Explain your answer.

Answer & Explanation:

The 4,500 dollars spent can be considered as a sunk cost, which means it has been incurred but cannot be recovered and cannot be considered as a cash flow.

The initial investment outlay is the total cost of the machine's based price, the shipping and installation, and the additional working capital which all equals to $148,000

Year 1 - $49,584

Year 2 - $52,000

Year 3 - $100,720

Yes, the machine should be bought, the 8% WACC generates a positive net present value.

the correct answer would be b, when, queen, calder hall and london.

explanation:

we always capitalize words when a paragraph or sentence is starting, when an important name is used, when a place is being written, or simply when a noun is used, etc. so in this sentence, sentence is starting from 'when', so it will be written in capital letters. secondly, queen is considered to be an important person, so it will also be written in capital letter. next, the name of the town is mentioned, i-e calder hall, which will also be written in capital letters. in the last,   city name is being used, 'london', which will also be written in capital letters. so option b is the most appropriate one.