Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $900,000. In addition the equipment would of $50,000 plus shipping costs of $10,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $100,000. The equipment would require increased net working capital of 60,000. The equipment is expected to save the company $70,000 per year in before-tax operating costs. The company's marginal tax rate is 35 % and its cost of capital is 11%.
a. What is the cash outflow at Time 0.
b. Calculate net operating cash flows in years 1, 2, and 3?
c. Apart from the calculations above, discuss 3 qualitative factors that the company should consider when making its decision on accepting the new project.
d. Calculate net present value. Should the machine be purchased?