You have been asked by the management of your company to evaluate the proposed acquisition of a new machine. The machine?s basic price is $50,000, and it will cost another $10,000 to modify it for the special use by your company. The machine falls into the MACRS 3-year class property (the MACRS percentage allowances are 0.33, 0.45, 0.15, and 0.07 in years 1,2,3,and 4 respectively). The project will require an increase in net working capital of $2,000 and it will last for three years at the end of which the machine can be scrapped for $20,000. The purchase of this machine will have no effect on revenues, but the management expects to have labor cost savings of $20,000 per year. The marginal tax rate of your company is 40 percent.

What is the amount of initial cash flow in year 0, i.e., the initial investment, if your company requires the new machine?
What are the operating cash flows in year in years 1,2, and 3?
If the project?s cost of capital is 10 percent, should you recommend the project?


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