XYZ is now evaluating the purchase of a new machine for $210,000installed with no NWC change. They plan to sell the machine at theend of 3 years for $30,000. MACRS 3 year depreciation. With themore efficient machine, labor savings per year are expected to be$70,000, $94,000 and $76,000 respectively. 40% tax. The cost ofcapital for this project is 8.%
The option of working cooperatively with another company hasjust been presented instead of purchasing the new machine. Thedetails of this option are: initial investment of $120,000, netoperating cash flows (years 1-3) of 47,000, 49,000 and 52,000respectively (already takes into account depreciation effect andterminal cash flow so there is no need to calculate depreciationeffect or terminal value just use these as-is for your analysis),cost of capital for this project is 8.2%.
1. Besides analyzing the numbers, list two areas of concern XYZmight look at when deciding whether to choose working cooperativelywith another company. State in 25 words or less.
