The president of the company you work for has asked you to evaluate tehe propose

Question

The president of the company you work for has asked you to evaluate tehe proposed acquisition of a new chromatograph for th firm's R&D department. The equipments basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold aftre 3 years for $30,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481.Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000.

Explanation / Answer

Year 0 1 2 3 Basic Price of chromatograph -70000 Additional Cost on Modification -15000 Initial Investment -85000 Increase in Net working Capital -4000 Depreciation 28330.5 37782.5 12588.5 Total cash flows -89000 28330.5 37782.5 12588.5 Internal Rate of Return IRR(total cash flows) Internal Rate of Return -7% MACRS Depreciation Rate 0.3333 0.4445 0.1481 Depreciation 28330.5 37782.5 12588.5 In absence of the tax rate of the firm, the internal rate of return on the project is -7%

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