Question 2. (15 points) Pierre Imports is evaluating the proposed acquisition of

Question

Question 2. (15 points) 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 into 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 percent. a. What is the cash outflow at Time 0?

Explanation / Answer

The cash outflow at Time 0 is the total amount incurred on Asset upto the point it is ready to be put to use.

Shipping Cost & Modifications are necessary for putting the asset to use. Therefore cash outflow at Time 0:

= Cost of equipment + Modification Cost + Shipping Cost = $90000 + $10000 + $2000 = $102000

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