Calculate NPV and advise whether this project should be accepted

Calculate NPV and advise whether this project should be accepted

Calculate NPV  and advise whether this project should be accepted based on its NPV

Subject: Business    / Finance
Question

You are evaluating a proposal to buy a new machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine is depreciated using prime cost method (3 years useful life), and it would be sold after 3 years for $60,000. The machine would require a $5,500 increase in net operating working capital (in year 0) and this will be returned at the end of year 3. The pre-tax labour costs would decline by $44,000 per year. The marginal tax rate is 35% and the WACC is 12%.

i. What are the project’s annual cash flows during years 0, 1, 2 and 3?

ii. Calculate NPV (6 marks) and advise whether this project should be accepted based on its NPV