You must evaluate a proposal to buy a new milling machine. The base price is $108,000 and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33, 45, 15, and 7 percent as discussed in Appendix 12A. The machine would require a $5,500 increases in working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pre-tax labor costs would decline by $44,000 per year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. What is the net cost of the machine for capital budgeting purposes, that is, the Year 0 project cash flow

Asset cost according to the international financial reporting standards should include all costs that are expected to bring the asset to a point of use which in the scenario will include its shipping and installation costs

jepessoa jepessoa · Answer 2 · 2020-04-01T14:53:41+02:00

Answer:

$120,500

Explanation:

There are 3 costs associated to this purchase:

$5,000: feasibility research ⇒ not included because it is considered a sunk cost, because no matter decision is made, it cannot be recovered.
$108,000: machine cost ⇒ included
$12,500: shipping and installation costs ⇒ all freight, insurance and installation costs are included in the machine's acquisition cost

total acquisition cost = $108,000 + $12,500 = $120,500

The total acquisition cost serves as basis for depreciation and capital budgeting analysis.