Capital would be recovered at the end of the project

Reference no: EM13829960

The equipment cost is $50,000 and it would cost another $10,000 to modify it. Assume that the equipment falls into the MACRS 3-year class. The equipment will be sold after 3 years for $20,000. It would require an increase in net working capital of $2,000 at teh start of the project. This working capital would be recovered at the end of the project. The new project will not have an effect on revenues but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The tax rate is 40%.

What is the cash flow at time=0?
What are the operating cash flows in Years 1-3?
What is the terminal cash flow in Year 3?
What is the book value of the asset at the end of Year 2?
What is the depreciation expense for Year 2?
Assume the cost of capital is 10%. What are the NPV and IRR of the project? Should the equipment be purchased?

Reference no: EM13829960

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