Your company is interested in acquiring a new high-speed label printer at a cost of $250,000. The machine will have to be modified for another $35,000. The company expects to sell the label printer for $110,000 at the end of year 4. (For depreciation purposes it falls in the MACRS 3 class which allows full cost recovery in four years in the annual rate of 33%, 45%, 15%, and 7% for years 1-4 respectively). The firm’s tax rate is 30% and tax is paid in the year that each revenue amount is received. Operating the equipment will require working capital of $20,000. The new equipment is expected to increase revenues before tax by $50,000 per annum. Given that your firm’s cost of capital is 12%, determine:

(a) What are the net operating cash flows in years 1, 2, and 3?

(b) What is the terminal cash flow?

(c) In your opinion, should the equipment be purchased? 

Answer rating: 100% (QA)

ab 3Year MACRS Depreciation Table Dep 94050 Year Dep 3300 Depreciation expense 285000x 33 94050 Depr... View the full answer