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You have been asked by the president of your firm to evaluate the proposed acquisition of new special-purpose equipment. The equipment's base price is $500,000, and another $50,000 for its installation costs. The equipment falls into the MACRS 3-year class, and it will be sold at the end of the project's 2-year life for $250,000. Use of the equipment will require net working capital investment equivalent to 20% of the following year's incremental revenues. The equipment will increase annual revenues by $100,000, and save the firm $200,000 in annual operating costs. The annual revenues and operating costs are expected to grow at an annual rate of 10% during the 2nd-year of the project. This equipment will be placed in an unoccupied site, which can otherwise be sold for $100,000 today. This site will be sold for the same price at the termination of the project. The depreciation of this site that your firm owns can be ignored. The firm's tax rate is 30 percent and the discount rate for the project is 12%.

a) Compute the initial outlay of the project. <-$670,000>

b) Compute the operating cash flows in Years 1 and 2. <$264,995; $304,326>

c) Compute the non-operating cash flow at the end of Year 2. <$333,679>

d) What is your recommendation on this project according to the conceptually most correct capital budgeting method? Why? Be concise! <$73,430>

Basic Finance, Finance

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