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M Garage is evaluating buying new testing equipment which will increase profits by $18,000 per year

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M Garage is evaluating buying new testing equipment which will increase profits by $18,000 per year. The project will require $45,000 in fixed assets investment, which will be depreciated straight-line to zero book value over the 3-year life of the project. It will cost $1000 to ship and install these assets and another $500 to train employees to operate the equipment. At the end of the third year, the salvage value of assets is estimated to be $1,600. Also, net working capital required is expected to increase by $3,000. The firm’s applicable tax rate is 40 percent.

a) What are the annual cash flows for years 1 and 2?

b) What is the cash flow for year 3?

c) Should the garage buy the equipment or not?