CCC Shop is considering a proj
CCC Shop is considering a project to improve their productionefficiency. They are trying to decide whether it is a good idea ornot to buy an automated injection molding machine which will resultin reducing pre-tax costs by $500,000 for each of the next threeyears. The molding machine will cost $1,000,000 and the IRS says itmust be depreciated as 3-year MACRS equipment. CCC Shop believesthey can sell the machine for $80,000 at the end of three years.The molding machine will require an initial investment to increaseinventory by $20,000, and then an additional inventory increase of$3,000 for each succeeding year of the project. CCC’s tax rate is35% and uses a discount rate of 14%. CCC already spent $5000investigating the feasibility of using the machine. Should CCCaccept the project?
PLEASE SHOW ALL WORK!!!
DO NOT use table!!!!
DO NOT use a table!!!!!!!!!!!!
Show work step by step without atable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Answer:
First, we will calculate the depreciation each year, which willbe:•D1 = $1,000,000(33.33%) = $333,300•D2 = $1,000,000(44.45%) = $444,500•D3 = $1,000,000(14.81%) = $148,100
•The book value of the equipment at the end of the projectis:•BV4 = $1,000,000 – ($333,300 + 444,500 + 148,100) = $74,100
The asset is sold at a GAIN to book value, so this creates a taxGain.•After-tax salvage value = $80,000 – ($80,000 – 74,100)(0.35) =$76,165•So, the OCF for each year will be:•OCF1 = $500,000(1 – 0.35) + 0.35($333,300) = $441,655•OCF2 = $500,000(1 – 0.35) + 0.35($444,500) = $480,575•OCF3 = $500,000(1 – 0.35) + 0.35($148,100) = $376,835
$20,000 of NWC at the beginning, and $3,000 more in NWC eachsuccessive year.We will subtract the $20,000 from the initial cash flow, andsubtract $3,000 each year from the OCF to account for thisspending.During 3rd year the project required an additional $3,000, but wewould get the money back immediately.So, the net cash flow foradditional NWC would be zero
NPV = – $1,000,000 – 20,000 + ($441,655 – 3,000)/1.14 +($480,575 – 3,000)/1.14^2 + ($376,835 + 26,000 + 76,165)/1.14^3
•NPV = +$55,575
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