The Reuth Company is evaluating the proposed acquisition of a new machine Answer
The Reuth Company is evaluating the proposed acquisition of a new machine. The machine’s base price is $600,000 plus shipping costs of $20,000. The machine falls into the MACRS 3-year class, and it would be sold after 5 years for $10,000. The machine would require an increase in net working capital of $25,000. The machine would have no effect on revenues, but it is expected to save the firm $200,000 per year for 5 years in before-tax operating costs. . Campbell’s marginal tax rate is 35 percent and its cost of capital is 13 percent. a. Calculate the cash outflow at time zero. b. Calculate the net operating cash flows for Years 1 through 5 MACRS 3 year class 0.33 0.45 0.15 0.07 c. Calculate the terminal year cash flow. d. Calculate NPV. Should the machinery be purchased? Why or why not?
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