Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $90,000. In addition the equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. The equipment falls in the MACRS 3 year class and will be sold after 3 years for $35,000. The equipment would require increased inventory of $6,000. The equipment is expected to save the company $35,000 per year in before-tax operating costs. The company’s marginal tax rate is 30 percent and its cost of capital is 11%.

a. What is the cash outflow at Time 0?

b. What are the net operating cash flows in years 1, 2, and 3?

c. Calculate the non-operating terminal year cash flow.

d. Calculate net present value. Should the machine be purchased?

e. What is the Cost of capital?