13-9

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $108.000,
and shipping and installation costs would add another $12.500. The machine falls into the
MACRS 3-year class, and it would be sold after 3 years for $65.000. The applicable
depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 13A. The machine
would require a $5.500 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 $44.000 per year. The marginal tax rate is 35%, and the WACC is 12%.
Also, the firm spent $5.000 last year investigating the feasibility of using the machine.

a. How should the $5.000 spent last year be handled?

b. What is the initial investment outlay for the machine for capital budgeting purposes,
that is, what is the Year 0 project cash flow?
c. What are the project’s annual cash flows during Years 1,2, and 3?
d. Should the machine be purchased? Explain your answer.

Jawab

a. $5.000 digunakan untuk menginvestigasi feasibility dari penggunaan mesin, maka

dana tersebut dianggap sunk cost dan tidak seharusnya diikutsertakan dalam
analisis karena dianggap tidak relevan.
b. The initial investment outlay for the machine :
Base price $108.000
Shipping+installation $12.500
Increase in NOWC $5.500
$126.000
c. Project’s annual cash flows :
- After tax savings : $44.000(1-T)
= $44.000(1-0,35)
= $28.600
- Depreciation cost
Basis price : price + Installment & shipping : $108.000+ $12.500 = $120.500
Tahun 1 : 33% x $120.500 = $39.765
Tahun 2 : 45% x $120.500 = $54.225
Tahun 3 : 15% x $120.500 = $18.075
 Depreciation tax saving :
Tahun 1 : 35% x $39.765 = $13.918
Tahun 2 : 35% x $54.225 = $18.979
Tahun 3 : 35% x $18.075 = $6.327
Depreciation cost tahun 4 : 7% x $120.500 = $8.435
Tax on SV : ($65.000-$8.435)(35%) = $19.798

Tahun 1 Tahun 2 Tahun 3

After-tax savings $28.600 $28.600 $28.600
Depreciation tax $13.918 $18.979 $6.327
savings
Salvage value $65.000
Tax on SV ($19.798)
Return of NWC $5.500

Project cash flow $42.518 $47.579 $85.629

d. WACC = 12%
0 1 2 3
Project $126.000 $42.518 $47.579 $85.629

NPV = -126.000 + 42.518/(1,121) + 47.579/(1,122) + 85.629/(1,123)

= $10.842
Karena nilai NPV positif maka project ini bisa diterima, perusahaan bisa membeli
mesin baru tersebut.

NOTE: No Findings for 13-9