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 $60,000, and it would cost another $17,000 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 $27,900. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,400. The machine would have no effect on revenues, but it is expected to save the firm $19,600 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.
- What is the Year-0 net cash flow?
- What are the net operating cash flows in Years 1, 2, and 3? Do not include recovery of NWC or salvage value in Year 3’s calculation here.
- Year 1:$ Year 2:$ Year 3:$
- What is the additional cash flow in Year 3 from NWC and salvage?
- If the project’s cost of capital is 13%, what is the NPV of the project? .
- Should the chromatograph be purchased?