The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,500 to modify it for special use. The maintenance cost of the machine is RM30,000 per annum. A. What is the net cost of the machine for capital budgeting purposes?
B. What are the net operating cash flows in Years 1, 2, and 3?
C. What is the terminal year cash flow?
D. If the project's cost of capital is 12 percent, should the machine be purchased?

Missing information:

The machine falls into the MACRS 3-year class, and it would be sold after  3  years  for  $65,000.  The  machine  would  require  an  increase  in net  working  capital (inventory)  of  $5,500.  The  milling  machine  would  have  no  effect on  revenues,  but  it  is expected  to  save  the  firm $44,000  per  year  in  before-tax  operating costs, mainly  labor. Campbell’s marginal tax rate is 35%

A. What is the net cost of the machine for capital budgeting purposes?

B. What are the net operating cash flows in Years 1, 2, and 3?

C. What is the terminal year cash flow?

D. If the project's cost of capital is 12 percent, should the machine be purchased?

Explanation:

net cash flow year 1 = [net savings x (1 - tax rate)] + (depreciation expense x tax rate) = ($44,000 x 65%) + ($39,765 x 35%) = $28,600 + $13,917.75 = $42,517.75

net cash flow year 2 = [net savings x (1 - tax rate)] + (depreciation expense x tax rate) = ($44,000 x 65%) + ($54,225 x 35%) = $28,600 + $18,978.75 = $47,578.75

net cash flow year 3 = [net savings x (1 - tax rate)] + (depreciation expense x tax rate) = ($44,000 x 65%) + ($18,075 x 35%) = $28,600 + $6,326.25 = $34,926.25

terminal cash flow = [sales price - (purchase cost - accumulated depreciation)] x (1 - tax rate) = [$65,000 - ($120,500 - $112,065)] x 0.65 = $50,702.25  

Year              cash flow

0                 -$126,000

1                   $42,517.75

2                 $47,578.75

3                $85,628.50

discount rate 12%

using an excel spreadsheet, NPV = $10,840.44

answer; be sure that the information on file is correct;