Question

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 $180,000, and it would cost another $45,000 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 $63,000. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $10,800. The machine would have no effect on revenues, but it is expected to save the firm $54,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 35%.

1. What is the Year 0 net cash flow? If the answer is negative, use parentheses.
   $
2. 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	$

3. What is the additional (nonoperating) cash flow in Year 3? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
4. If the project's cost of capital is 12%, should the chromatograph be purchased?
   -Yes or No

Answer 1