You have been asked by your company to evaluate the proposed acquisition of new equipment. The equipment's
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Question:
- You have been asked by your company to evaluate the proposed acquisition of new equipment. The equipment's price is $140,000, and It will cost another $30,000 to modify it for special use by the firm. The equipment falls in the MACRS 3-yearclass, and it will be sold after three years for $60,000. Use of the equipment would require an increase in net operating working capital (spare parts inventory) of $8,000. The equipment would have no effect on revenues but is expected to save the company $50,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40.0%. MACRS depreciation schedule, Year 1=33%, Year 2=45%, Year 3=15%, Year 4= 7%.
a. What is the net investment (initial outlay) for the project?
b. What is the net operating cash flow for year3 1 to 3 ?
c. What is the terminal year cash flows ?
d. If the project's cost of capital is 12%, should the equipment be purchased?
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
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