Question
The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's 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 firm's R&D department. The equipment's basic price is $140,000, and it would cost another $35,000 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 $49,000. The MACRS rates for the first 3 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 $5,600. The machine would have no effect on revenues, but it is expected to save the firm $56,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 30%.
What is the Year 0 net cash flow? If the answer is negative, use parentheses.
$
What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
Year 1 $
Year 2 $
Year 3 $
What is the additional (nonoperating) cash flow in Year 3? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
If the project's cost of capital is 11%, should the chromatograph be purchased?
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