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. The equipment's basic price is $71,000, and it would cost another $18,500 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 $33,600. 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 $2,640. The machine would have no effect on revenues, but it is expected to save the firm $21,100 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations.
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What is the Year-0 net cash flow?
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What are the net operating cash flows in Years 1, 2, and 3? Do not include recovery of NWC or salvage value in Year 3's calculation here.
Year 1: $ Year 2: $ Year 3: $ -
What is the additional cash flow in Year 3 from NWC and salvage?
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If the project's cost of capital is 12%, what is the NPV of the project? .
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Should the chromatograph be purchased?
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