We must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $190,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $102,000. 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 $51,000 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.
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