Question
The Abe Lincoln Company is evaluating the acquisition of new equipment. The equipments base price is $300,000, and it would cost another $20,000 to modify
The Abe Lincoln Company is evaluating the acquisition of new equipment. The equipments base price is $300,000, and it would cost another $20,000 to modify it for special use by the firm. The equipment falls into the MACRS 3-year class (33.33% depreciation in year 1, 44.45% in year 2, 14.81% in year 3, and 7.41% in year 4), and it would be sold after 3 years for $80,000. The equipment will require an increase in net working capital of $20,000. The equipment will have no effect on revenues, but is expected to save the firm $50,000 per year in before tax operating costs, mainly labor. The firms marginal tax rate is 40%.
- What is the net outlay for the equipment?
- What are the net cash inflows in years 1, 2, and 3?
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