Wilson Machine Tools Inc a manufacturer of fabricated

metal products #4897

Wilson Machine Tools, Inc., a manufacturer of fabricated metal products, is considering
purchasing a high-tech computer-controlled milling machine at a cost of $95,000. The cost of
installing the machine, preparing the site, wiring, and rear ranging other equipment is expected
to be $15,000. This installation cost will be added to the cost of the machine to determine the
total cost basis for depreciation. Special jigs and tool dies for the particular product also will be
required at a cost >: $10,000. The milling machine is expected to las) 10 years, the jigs and dies
only five years. Therefore, another set of jigs and dies has to be purchased at the end of five
years. The milling machine will have a $10,000 salvage value at the end of its life, and the
special jigs and dies are worth only $300 as scrap metal at any time in their lives. The machine
is classified as a seven-year MACRS property, and the special jigs and dies are classified as a
three-year MACRS property. With the new milling machine, Wilson expects an additional annual
revenue of $80,000 due to increased production. The additional annual production costs are
estimated as follows: materials, $9,000; labor, $15,000; energy, $4,500; and miscellaneous
O&M costs, $3,000. Wilson's marginal income-tax rate is expected to remain at 35% over the
project life of 10 years. All dollar figures represent today's dollars. The firm's market interest rate
is 18%, and the expected general inflation rate during the project period is estimated at 6%.(a)
Determine the project cash flows in the absence of inflation.(b) Determine the internal rate of
return for the project in part (a).(c) Suppose that Wilson expects price increases during the
project period: material at 4% per year, labor at 5% per year, and energy and other O&M costs
at 3% per year. To compensate for these increases in prices, Wilson is planning to increase
annual revenue at the rate of 7% per year by charging its customers a higher price. No changes
in salvage value are expected for the machine or the jigs and dies. Determine the project cash
flows in actual dollars.(d) In part (c), determine the real (inflation-free) rate of return of the
project.(e) Determine the economic loss (or gain) in present worth caused by inflation.View
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Wilson Machine Tools Inc a manufacturer of fabricated metal products

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