Reference no: EM131359257
The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromoatograph for the firms R&D department. The equipments basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograpph, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. The MACRS rates for the first 3 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 $4000. 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 firms 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 (non operating) cash flow in year 3?
d. If the projects cost of capital is 10%, should the chromograph be purchased?
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