You are trying to determine the initial investment to replace an old Equipment with a new. The proposed equipment’s purchase price is 65,000, and an additional 15,000 will be necessary to install it....

You are trying to determine the initial investment to replace an old Equipment with a new. The proposed equipment’s purchase price is 65,000, and an additional 15,000 will be necessary to install it. It will be depreciated under Modified Accelerated Cost Recovery System for Depreciation (MACRS) using a 3-year recovery period. This equipment has a salvage value of 23,000. The equipment requires an initial increase in net working capital of 20,000. While operation, the equipment will generate 40,000 in revenue and will cost 5,000 to operate in the first year. Inflation is 2.5%. revenue, operating cost, and required working capital will increase by the rate of inflation for year 2 and 3. If The firm pays taxes at a rate of 40% and the firm’s weighted Average cost of capital (WACC) is 12%.  Should you invest in the project?

Extracted text: Year 0 YI Y2 Y3 Y4 Fixed Asset Investment Working Capital (inventory) NWC (% of sales) Change in working capital Investment Revenue Operating expense Depreciation Operating income before taxes (EBIT) Taxes (40%) EBIT (1- T) Add: Depreciation Net Operating Cash Flow Terminal cash flow or Recovery of working capital investment Total project cash flow