Financial Analysis of Proposed Machine Acquisition

Riverview Company is evaluating the acquisition of a new production machine with a base price of $200,000. Calculations include net initial outlay, depreciation expense, annual cash flow, tax effects, terminal cash flow, and NPV at a cost of capital of 12%. The analysis considers operating costs, tax liabilities, salvage value, and NWC recapture to determine the financial feasibility of the investment over a 2-year period.

• Financial analysis
• Machine acquisition
• NPV calculation
• Tax effects
• Cash flow analysis

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1. Question 15. Riverview company is evaluating the proposed acquisition of a new production machine. The machine s base price is $200,000 and installation costs would amount to $28,000. Also, 10,000 in net working capital (NWC) would be required at installation. The machine would save the firm $110,000 in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%.

2. Step 1A: Calculate net initial outlay Initial Outlay ($200,000) Installation costs (28,000) ______________________________________ Depreciable asset (228,000) NWC (10,000) _____________________________________ Net Initial Outlay ($238,000) Cash flow 0 = Cfj0

3. Step 1B: Calculate depreciation expense Depreciation expense= (Depreciable asset/class life) ???????????? ??????? =($228,000) = ($76,000) 3

4. Step 2: Calculate the annual cash flow Operating costs [SAVINGS+] 110,000 Depreciation expense (76,000) ____________________________________________ EBIT (Taxable income) 34,000 Tax liability (Taxable income*34%) (11,560) ____________________________________________ EAT (Operating cash flow) 22,440 Depreciation reversal (Add back depreciation) 76,000 ____________________________________________ ACF (Annual Cash Flow) $98,440 Cash flow 1 = Cfj1

5. Step 3A: Calculate the tax effect Salvage value (SV) $100,000 Book value (BV) (76,000) ____________________________________ Proceeds from sale [gain] 24,000 Tax rate (34%) x 0.34 ____________________________________ Tax liability (proceeds*34%) $(8,160)

6. Step 3B: Calculate the terminal cash flow Salvage value (SV) $ 100,000 Tax liability (8,160) NWC recapture __________________________________________ Cash flow 1 ___________________________________________ TCF (Terminal cash flow) 10,000 +98,440 $101,840 200,280 Cash flow 2 = Cfj2

7. Step 4: Calculate NPV Cfj0 = ($238,000) Cfj1 = $98,440 Cfj2 = $200,280 I/yr = 12% NPV = 9,555 We only have two cash flows because the company is planning to keep the machine only for 2 years, so we disregard the class life when calculating NPV