Question

Harriman Manufacturing Co. is evaluating the purchase of a new forklift. The quoted price is $50,000, and it would cost Harriman another $10,000 for related capital costs such as transportation and equipment modification for special use. The total investment would fall into MACRS three year class with depreciation rates being applied to the full capitalized costs, not deducting salvage, at 33%, 45%, 15% and 7% in years 1-4, respectively. Harriman expects that the equipment would be sold in the fourth year, after three years of use, for a price of $25,000. During the three year operating period spare parts inventory would increase by $3,000 to maintain the equipment, but non-interest bearing accounts payable would increase by $1,000. Although the equipment is not expected to increase the firm's revenue, it is expected to save it $20,000 in before tax labor operating costs annually. (Problem set up is important.) (Clue: When do you need spare parts?) Harriman's tax rate is 40%.

a. Calculate the expected net cash outlay at the beginning of the first year.

b. Estimate the net operating cash flows in years 1, 2 and 3, and assume they occur at the end of each year.

c. What is the dollar value of the net cash terminal value in the fourth year?

d. If Harriman's weighted average cost of capital is 10%, what are the investment's i. Net Present Value? ii. Internal Rate of Return? iii. Simple Payback Period? iv. Should the investment be made? Why or why not?

Show the set up or calculator entries for all calculations.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

IT IS WRITTEN THAT EQUIPMENT WILL SOLD IN 4 TH YEAR, IT IS TO BE TAKEN AS END OF 3RD YEAR.