Capital Budgeting Exercise 1 You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $1000 initially, and then $300 per year in maintenance costs. Machine B costs $1300 initially,

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Your company has spent $400,000 on research to develop a new computer game. The firm is planning to spend $600,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine will be used for 3 years, has a $100,000 estimated resale value at the end of three years, and will be depreciated straight line over 4 years. Revenue from the new game is expected to be $800,000 per year, with costs of $300,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 8 percent, and it expects net working capital to increase by $150,000 at the beginning of the project.

Should you proceed with this project? Explain.

Year

0

1

2

3

Sales

Fixed Costs

Depreciation

EBIT

Taxes

Net Income

Operating
Cash Flow

Change in NWC

Change
In Fixed Assets

Total
Cash Flow

Should you proceed with this project? Explain.

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