Problem $11-07$

New$-$Project Analysis

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 $$100,000,$ and it would cost another $$25,000$ 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 $$25,000.$ The MACRS rates for the first $3$ years are $0\mathrm{.}3333,0\mathrm{.}4445$ and $0\mathrm{.}1481.$ Use of the equipment would require

an increase in net working capital $($spare parts inventory$)$ of $$5,000.$ The machine would have no effect on revenues, but it is expected to save the firm $$30,000$

per year in before$-$tax operating costs, mainly labor. The firm's marginal federal$-$plus$-$state tax rate is $40\%.$

a$.$ What is the Year $0$ net cash flow? If the answer is negative, use parentheses.

$

b$.$ What are the net operating cash flows in Years $1,2,$ and $3?$ Do not round intermediate calculations. Round your answers to the nearest dollar.

Year $1$$

Year $2$

Year $3$

$

c$.$ What is the additional $($nonoperating$)$ cash flow in Year $3?$ Do not round intermediate calculations. Round your answer to the nearest dollar.

d$.$ If the project's cost of capital is $11\%,$ should the chromatograph be purchased?