Harbor Medical Corp. is considering the purchase of a piece of diagnostic equipment that costs $380,000. Shipping and installation costs will be an additional $30,000. Additional spare parts will cause inventory to increase by $18,000 at the beginning of the project. The equipment will be depreciated based on a 3-year MACRS life. Incremental revenues from the new equipment should be $450,000 in the first year and will increase at 15% per year over the expected 4-year economic life. Incremental cash operating expenses (i.e., not including depreciation) associated with the equipment should be $250,000 the first year and these expenses will increase 10% each year over the project life. The equipment has a working life of 4 years. At the end of 4 years the equipment will be obsolete and can be sold as scrap for $10,000. Assume Harbor Medical Corp. has a cost of capital (required rate of return) of 15% and a marginal tax rate of 20%. MACRS depreciation rates for a 3-year asset are as follows:
Yr 1: 33% Yr 2: 45% Yr 3: 15% Yr 4: 7%
Answer the following questions related to this project.
a) Calculate the Initial Investment for this project.
b) Calculate the Year 1 Operating Cash Flow (or Annual Operating Cash Flow) for this project. (Year 1 cash flow ONLY - not all of the project vears)