Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new flux capacitor for the firm’s R&D department.  The equipment’s basic price is $70,000 and it would cost another $15,000 to modify it for special use by your firm.  The flux capacitor, which has a MACRS 3-year recovery period, would be sold after 3 years for $30,000.  Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000.  The flux capacitor would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor.  The firm’s marginal tax rate is 40 percent. If the project’s cost of capital is 10 percent, should the flux capacitor be purchased?