Reference no: EM132911433

The Ewert Company is evaluating the proposed acquisition of a spectrometer for the firm's R&D department. The equipment's base price is $140,000, and it would cost another $25,000 to modify it for special use by your firm. The equipment would be depreciated over 3-years using the straight-line method; afterwards it would be sold for $60,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $8,000. The spectrometer would have no effect on revenues, but it is expected to save the firm before tax operating costs of $70,000 in its first year of operation, $60,000 in the second year, and $50,000 in the third year. The firm's federal-plus-state tax rate is 40 percent.

Problem a. Prepare a schedule showing the net operating cash flows in Years 1, 2, and 3.

Problem b. What is the additional (nonoperating) cash flow in year 3?

Problem c. If the project's cost of capital is 12 percent, compute the project's net present value.