1) You have been asked by president of your firm to estimate proposed acquisition of new special-purpose equipment. Equipment's base price is= $500,000, and another= $50,000 for its installation costs. Equipment falls into MACRS 3-year class, and it will be sold at end of the project’s 2-year life for= $250,000. Use of equipment will need net working capital investment equivalent to= 20% of following year’s incremental revenues. Equipment will rise annual revenues by= $100,000, and save firm= $200,000 in annual operating costs. Annual revenues and operating costs are expected to rise at the annual rate of= 10% in the 2nd-year of project. This equipment will be placed in the unoccupied site, which can otherwise be sold for= $100,000 today. This site will be sold for same price at termination of project. Depreciation of this site that your firm owns can be ignored. Firm's tax rate is= 30% and discount rate for project is 12%.
(a) Calculate initial outlay of the project.
(b) Calculate the operating cash flows in Years 1 and 2.
(c) Calculate non-operating cash flow at the ending of Year 2.
(d) What is your suggestion on this project according to conceptually most right capital budgeting method? Explain why?