Question
A company is evaluating the acquisition of a new piece of equipment. The base price of the equipment is $100,000 and it will cost an
A company is evaluating the acquisition of a new piece of equipment. The base price of the equipment is $100,000 and it will cost an additional $10,000 for shipping and installation. The company also paid a firm $5,000 to determine the feasibility of the new piece of equipment. The equipment falls in the MACRS 3 year class and would be sold after 4 years for $18,000. The new equipment would require an increase in inventory of $4,000, which will be recovered at the end of the project. The equipment is expected to generate an extra $30,000 per year in revenues, but have no effect on operating costs. WACC is 10% and its marginal tax rate is 40%.
MACRS 3 year class: Year 1: 33%; Year 2: 44%; Year 3: 14%; Year 4: 7%
1. What is the Year 0 Cash Flow?
2. What is the Operating Cash Flow in Years 1 and 2?
3. What is the Free Cash Flow in Year 3?
4. What is the NPV?
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