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 firms R&D department. The equipment's basic price is $80,000, and it would cost another $12,000 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 $36,000. The MACRS rates for the first three 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 $3,200. The machine would have no effect on revenues, but it is expected to save the firm $24,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 30%.

1. What is the Year-0 net cash flow? If the answer is negative, use minus sign. $

2. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.

Year 1	$
Year 2	$
Year 3	$

3. What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar. $

4. If the project's after-tax cost of capital is 14%, should the chromatograph be purchased?