Example #$4$

You have been asked by the president of your company to evaluate the proposed acquisition of a new flux capacitor 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 flux capacitor, which has a MACRS $3-$year recovery period, would be sold after $3$ years for $$30,000.$ Use of the equipment would require an increase in net working capital $($spare parts inventory$)$ of $$4,000.$ The flux capacitor 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 tax rate is $40$ percent. If the project's cost of capital is $10$ percent, should the flux capacitor be purchased?