1. The Dauten Toy Corporation

1. The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $9,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine’s much greater efficiency would cause operating expenses to decline by $1,000 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Dauten’s marginal federal-plus-state tax rate is 25%, and its WACC is 11%.

What is the NPV of the incremental cash flow stream? A negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent. ______

3. You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $148,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $64,000. The machine would require a $7,500 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 $36,000 per year. The marginal tax rate is 25%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.

b)What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $_____

c)What are the project’s annual cash flows during Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1: $ ___
Year 2: $ ___
Year 3: $ ___

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