Reference no: EM132987910
Question - New Project Analysis: 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. The 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 percent.
Required -
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 project's cost of capital is 10 per cent, should the chromatograph be purchased?
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