Today is T=0. The UFRO Company is considering the replacement of an existing computer with a new computer; faster and with expanded capacity. If the new computer is purchased, the existing (old) computer will be sold for $45,000. The existing computer was purchased two years ago (T=-2) for $350,000. It is being depreciated over its five-year life using the 3-year MACRS schedule. It is expected to salvaged for $25,000 (T=3).

The new computer will be purchased for $750,000. If the new computer is purchased, accounts receivable increase immediately by $25,000; inventory will decrease immediately by $55,000; and accounts payable will decrease immediately by $30,000. The UFRO Company has a 30% corporate tax rate. The modification to the building, paid by UFRO, will cost $120,000. Shipping and installation for the new computer will cost $65,000 but it will be paid by the manufacturer.

If the new computer is purchased, sales in year 1 will be $650,000, sales in year 2 will be $750,000, and sales in year 3 will be $850,000. Without the new computer, sales in each year will be $500,000. Operating expenses will be 40% of sales with the new computer; they are 45% of sales with the old computer. If the new computer is purchased, accounts receivable will decrease at T=1 by $10,000 and at T=2 by $15,000.

The new computer will be depreciated using the 3-year MACRS schedule [yr.1: 33%; yr. 2: 45%; yr. 3:15%; yr. 4: 7%]. The new computer will be sold, however, after three (3) years for $30,000. The UFRO Company has a cost of capital of 12%. Identify the relevant cash flows for capital budgeting.

Determine the relevant cash flows for capital budgeting purposes.