Evaluating a New Equipment Purchase

Please use Excel for this question so that the solution can be displayed in a clear and organized manner.

Your company is evaluating new equipment that will cost $1,000,000. The equipment is in the MACRS 3-year class and will be sold after 3 years for $100,000. Use of the equipment will increase net working capital by 100,000. The equipment will save $450,000 per year in operating costs. The company's tax rate is 30 percent and its cost of capital is 10%.

MACRS Depreciation Percentages for three-year class life assets: 33% 45% 15% 7%

Please complete the following:
Part a. Calculate the cash flow in Year 0.
Part b. Calculate the incremental operational cash flows.
Part c. Calculate the terminal year cash flow.
Part d. Calculate the project's payback period.
Part e. Calculate the project's NPV.
Part f. Calculate the project's IRR.
Part g. Calculate the project's MIRR.
Part h. Make the investment decision: Should the project be accepted or rejected? Why or why not?

Solution Summary

This solution explains how to evaluate the new equipment purchase by calculating cash flow, payback, NPV, IRR and MIRR. This solution is enclosed within an attached Excel document.