A new piece of equipment costs $100,000 and another $20,000 to modify it for its special use by your firm. The machine falls into the MACRS 3-year class, so that over its 4-year life the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81% and 7.41%. The machine will be sold after 3 years for $40,000. The use of this new machine will increase net working capital (spare parts) by $10,000. The new machine will reduce annual before-tax operating costs by $35,000. The firm's tax rate is 40%.
A) What is the Year 0 cash flow?
B) What are the net operating cash flows in years 1, 2 and 3. (show work)
C) What is the additional (non-operating) cash flow in Year 3?
D) If the project's cost of capital is 10%, should the machine be purchased?