Note: You can either use Excel or write your answers on a separate sheet of paper.

In either case, please make sure that you show all of your work! You have been asked to evaluate the proposed acquisition of a new machine for the firms R&D department. The equipments base price is $70,000 and it would cost another $15,000 to modify it for special use. The machine, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase 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 in before-tax operating costs, mainly labor. The firms marginal federal-plus-state tax rate is 25%.

1. Calculate the Operating Cash Flows for Years 1, 2, and 3.

2. What are the cash flows associated with the investment in NWC? At what times do they occur?

3. What are the cash flows associated with Net Capital Spending? At what times do they occur?

4. Calculate the machines Net Present Value. Assume that the projects cost of capital is 10%.