The president of your company, ChuckERat Enterprises, has asked you to evaluate the proposed development of a new series of loud, mind-numbing, arcade-style games by the firms R&D department. The new machinery needed for development has a base price of $175,000, and it would cost another $25,000 to modify it for special use by your firm. The new machinery, would fall into the MACRS 3-year class and would be sold after 3 years for $50,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the machinery would require an increase in net working capital (spare parts inventory) of $10,000. The machine would increase revenues by $73,000 each of the next three years and would not impact operating expenses. The firms marginal tax rate is 25%.

a. What is the Year-0 cash flow? What are the cash flows in Years 1, 2, and 3 (specifically show the additional, nonoperating costs that come in the final year, year 3)?

b. If the projects cost of capital is 9%, should the machinery be purchased? Explain/show why or why not. Hint: You can begin your Years 1-3 cash flow calculations by subtracting appropriate depreciation amounts from $73,000 in each year.

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