Question: The Campbell Company is evaluating the proposed acquisition of a new milling equipment. The equipment's base price is dollar 108,000, and it would cost another dollar 12,500 to modify it for special use. The equipment falls into the MACRS 3-year class, and it would be sold after 3 years for dollar 65,000. The equipment would require an increase in net working capital (inventory) of dollar 5,500. The milling equipment would have no effect on revenues, but it is expected to save the firm dollar 44,000 per year in before tax operating cost, mainly labor. Campbell's marginal tax rate is 35 percent.
[A] Determine the net cost of the equipment for capital budgeting purposes? [That is, what is the Year 0 net cash flow?]
[B] Determine the net operating cash flows in Years 1, 2 & 3?
[C] What is the additional Year 3 cash flow (that is, the after-tax salvage and the return of working capital)?
[D] If the project's cost of capital is 12 percent, should the equipment be purchased?