You are evaluating a new machine. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it. The machine falls into MACRS 3-year class and would be sold after 3 years for $30,000. The MACRS rates for three years are 0.3333, 0.4445, and 0.1481. The machine requires an in net working capital (inventory) of $4,000. The machine would have no effect on revenues, but it is expected to save the firm $25,000 per year before tax operating costs. The firm’s tax rate is 40%.
a) What is the year 0 net cash flow?
b) what are the net operating cash flows in year 1,2, and 3?
c) what is the additional year 3 cash flow (after tax salvage and the return of working capital?
d) should you purchase the machine (assume cost of capital is 10%)