Diagnostics Unlimited, a company with a marginal ordinary tax rate of 34% (no state tax), capital gains tax rate of 15%, and an MARR of 13%, purchased research and development (R & D) equipment at EOY zero for $2,000,000 to develop a non-invasive glucose monitor for diabetic patients. Operating costs are $650,000 per year. In years one and two, they make no income. In year three, they patent a new diagnostic technique, sell the patent rights for $4,000,000, and sell the R&D equipment for $2, 400,000. Note that in the first two years the company operates the project at a loss, and thus has a net tax savings for this project in years 1 and 2.
a) Find the cash flows for years 0, 1, 2 and 3.
b) Find the net present worth at the company's MARR.
c) Find the internal rate of return.