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XYZ is now evaluating the purchase of a new machine for $210,000 installed with no NWC...

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Finance

XYZ is now evaluating the purchase of a new machine for $210,000installed with no NWC change. They plan to sell the machine at theend of 3 years for $30,000. MACRS 3 year depreciation. With themore efficient machine, labor savings per year are expected to be$70,000, $94,000 and $76,000 respectively. 40% tax. The cost ofcapital for this project is 8.%

The option of working cooperatively with another company hasjust been presented instead of purchasing the new machine. Thedetails of this option are: initial investment of $120,000, netoperating cash flows (years 1-3) of 47,000, 49,000 and 52,000respectively (already takes into account depreciation effect andterminal cash flow so there is no need to calculate depreciationeffect or terminal value just use these as-is for your analysis),cost of capital for this project is 8.2%.

1. Besides analyzing the numbers, list two areas of concern XYZmight look at when deciding whether to choose working cooperativelywith another company. State in 25 words or less.

Answer & Explanation Solved by verified expert
4.2 Ratings (545 Votes)
Year cost of new machine MACRS rate annual depreciation 1 210000 3333 69993 2 210000 4445 93345 3 210000 1481 31101 accumulated depreciation 194439 Book value at the end of year 3 210000194439 15561 Gain on sale of machine 3000015561 14439 tax on gain on sale 1443940 57756 after tax sale proceeds 3000057756 242244 Year 0    See Answer
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