Statement of the problem for the next three questions: The Test Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,000 to modify it for special use by your firm. The machine will be depreciated under the straight line method, with a life of 3 years and a salvage value estimate of zero. The machine will be sold after 3 years for $50,000. The machine would require an increase in net working capital (inventory) of $2,000. The working capital will be recovered in full when the chipper is sold. The milling machine would have no effect on revenues, but it is expected to save the firm $40,000 per year in before-tax operating costs, mainly labor. Test’s marginal tax rate is 40 percent.
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