(Solution Download) The president of the company you work for has asked


The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The machine would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal plus-state tax rate is 40%.
a. What is the Year-0 net cash flow?
b. What are the net operating cash flows in Years 1, 2, and 3?
c. What is the additional (nonoperating) cash flow in Year 3?
d. If the project's cost of capital is 10%, should the chromatograph be purchased?

 







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