You have been asked by the president of your company to evaluate the proposed acquisition of new
Question:
You have been asked by the president of your company to evaluate the proposed acquisition of new equipment.The equipment's basic price is RM193000, and shipping costs will be RM7700.It will cost another RM23200 to modify it for special use by your firm and an additional RM13500 to install the equipment.The equipment falls in the MACRS 3-year class, and it will be sold after 3 years for RM30900.The equipment is expected to generate revenue of RM178000 per year with annual operating costs (excluding depreciation) of RM84000.The firm's tax rate is 28% and its cost of capital is 10%..
What is the firm's initial investment of the machine and what is the operating cash flow forom Year 1 - 3?Should the company invest in this new equipment?
Note: Under the MACRS 3-year class, depreciation is 33% in first year, 45% in second year, 15% in third year and 7% in fourth year.