Reference no: EM132055975
The base price of a spectrometer is $140,000, and shipping and installation costs would add another $30,000. The machine falls into the MACRS 3-year class (33%, 45%, 15% and 7%) and it would be sold after 3 years for $60,000.
The machine would require a $8,000 increase in working capital (increased inventory less increased accounts payable).
There would be no effect on revenues, but pre-tax labor costs would decline by $50,000 per year.
The marginal tax rate is 40%, and the WACC is 12%.
1. What is the initial investment outlay, that is, the Year 0 project cash flow?
2. What are the net operating cash flows during Years 1, 2, and 3?
3. Should the machine be purchased? Explain your answer.
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