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You are assigned to evaluate the proposed acquisition of new special-purpose equipment. The equipment's base price is $700,000, and another $60,000 modification cost to
You are assigned to evaluate the proposed acquisition of new special-purpose equipment. The equipment's base price is $700,000, and another $60,000 modification cost to tailor it for the project. The equipment falls into the MACRS 3-year class, and it will be sold at the end of the project's 2-year life for $220,000. Use of the equipment will require net working capital investment equivalent to 8% of the following year's incremental revenues. The equipment will increase annual revenues by $250,000, and save the firm $150,000 in annual operating costs in the first year. The annual revenues and operating costs are expected to grow at an annual rate of 5% during the 2nd-year of the project. This equipment will be placed in an unoccupied site, which can otherwise be sold for $150,000 today. This site will be sold for the same price at the termination of the project. The depreciation of this site that your firm owns can be ignored. The firm's tax rate is 21 percent and the discount rate for the project is 14%. Calculate the initial outlay of the project. (a) (b) (c) (d) Calculate the operating cash flows (OCF) in Years 1 and 2. Calculate the non-operating cash flows (i.e., capital spending and change in NWC) at the end of Year 2. What is your recommendation on this project according to the conceptually most correct capital budgeting method? Explain your recommendation numerically!
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