The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D Department. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. The MACRS rates for the first 3 years are 0.33333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The machine would have no effect on revenues, but is expected to save the firm $25,000 per year in before tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%.
What is the Year-0 net cash flow?
What are the net operating cash flows in years 1, 2, & 3?
What is the additional (nonoperating) cash flow in year 3?
If the project’s cost of capital is 10%, should the chromatograph be purchased?