You have been asked by the President of your company to evaluate the proposed acquisition of a new piece of equipment with the following additional facts:
-The equipment's basic price is $50,000, and it will cost another $10,000 to modify the equipment for special use by your firm.
-The equipment falls into the MACRS five year class life(applicable annual percentages are 20%, 32%, 19%, 12%, 11% and 6%) and the equipment will be sold after two years for $40,000.
-Use of the equipment requires an increase in net working capital by your company of $2,000 (capital is used to purchase spare parts inventory).
-The equipment will have no effect on your company's revenues, but is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor costs.
-Your firm's marginal income tax rate is 40%
-Your firm's capital structure is 50% debt and 50% equity. The firm calculates its WACC to be 9% using the following inputs: before-tax cost of debt of 10%, cost of equity of 12%, and expected market return of 12%, a risk free rate of 4%, and a firm beta of 1.0.
Show all work and calculations,
1. What is the net investment in the project (that is what is the Year 0 net cash flow)?
2. What are the operating cash flows in Year 1 and Year 2 resulting from the project?
3. What is the NPV of this project?