Capital gains tax rate 0.15 Income tax rate 0.30 Straight line depreciation

1. A firm is considering purchasing a new asset. Use the information in the chart below to find the net cash outlay for this asset.

	0
Cost of New Asset	125,000
Installation Costs	0
Old Asset
Book Value	0
Proceeds on Sale	32,000
Initial Purchase Price	100,000
Decrease in Working Capital	7,000

2. The firm is projecting the cash flows in the chart below for the asset above.Find the marginal operating cash flows for this asset.

Year	0	1	2	3
Revenues		138,000
Revenue Inflation Rate			9.00%	9.00%
Expenses		44,000
Expense Inflation Rate			5.00%	5.00%
Useful life	3
Operating Cash Flows, Old Asset		47,000	47,000	47,000

3. At the end of Year 3, the asset purchased in Year 0 will be sold for $20,000. Find the terminal cash flow.

4. What is this project's IRR?

5. If the firm's cost of capital is 11%, should the firm invest in this asset? Justify your answer.