Question
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 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. It will be a 4-year project.
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The equipments basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm.
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Use of the equipment would require an increase in net operating working capital (spare parts inventory) of $4,000.
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The machine would have no effect on revenues, but it is expected to save the firm $20,000 per year (for 4 years) in before-tax operating costs, mainly labor.
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The chromatograph, which falls into the MACRS 3-year class (such assets are depreciated over 4 years as discussed in Appendix 13A). The MACRS rates for the 4 years are 33.33%, 44.45%, 14.81%, and 7.41%.
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It would be sold after 4 years for $31,000.
If the firms marginal federal-plus-state tax rate is 40%,
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What is the Year 0 cash flow?
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What are the operating cash flows in Years 1, 2, 3, and 4?
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What is the additional (terminal) cash flow in Year 4?
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If the projects cost of capital is 10%, should the chromatograph be purchased?
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