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Considering the purchase of a new cnc machine

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Reference no: EM131706604

HT Tool Co is considering the purchase of a new CNC machine. This project is not expected to change sales, but should save the firm in labor costs. The labor savings is expected to be $46,000 (before tax). The machine costs $110,000. It will require $14,000 in modifications to support the needs of HT Tool. An increase in inventory (net working capital) of $6,500 will be necessary.

  • The machine will be depreciated using MACRS with a 3-year class life (half-year convention).
  • The firm's tax rate is 35%.
  • The plan is to sell the machine after 3 years and the expected selling price then is estimated at $65,000.
  • The hurdle rate for this project is 11%

Begin with a blank worksheet and show your setup:

  1. What is the terminal (NOT operating) cash flow in year 3?
  2. What are the NPV and IRR for this project?
  3. Should be accepted?

Reference no: EM131706604

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