Moore Company is considering an expansion project. It would require the acquisition of an asset that would be depreciated straight line to zero over the 4 years of the project. It expects to be able to sell the asset for $50,000 at the end of year 4. If the project is undertaken it would require an increase in NWC of $40,000 at the beginning. This NWC will be recovered at the termination of the project. If the project is undertaken the firm would realize an additional $600,000 in sales over each of the next four years. Operating costs excluding depreciation would also increase by $200,000 per year for 4 years. The companyÕs tax rate is 40%, and the cost of capital is 10%. What is the most the company should pay for the needed equipment?

To determine the maximum amount the company should pay for the needed equipment, we need to calculate the net present value (NPV) of the project. The NPV is the sum of the present value of cash flows generated by the project, subtracted by the initial investment.

Here are the steps to calculate the NPV:

1. Calculate the annual cash flows:
- Sales: $600,000 per year for 4 years = $2,400,000 in total
- Operating costs (excluding depreciation): $200,000 per year for 4 years = $800,000 in total
- Depreciation: $50,000 per year for 4 years = $200,000 in total

Net cash flow before taxes: Sales - Operating costs - Depreciation
Net cash flow before taxes: $2,400,000 - $800,000 - $200,000 = $1,400,000 per year for 4 years

2. Calculate the tax payable each year:
Tax payable: Net cash flow before taxes * Tax rate
Tax payable: $1,400,000 * 0.4 = $560,000 per year for 4 years

3. Calculate the after-tax cash flows:
After-tax cash flow: Net cash flow before taxes - Tax payable
After-tax cash flow: $1,400,000 - $560,000 = $840,000 per year for 4 years

4. Calculate the present value of cash flows:
We need to discount the after-tax cash flows at the cost of capital, which is 10%.
The present value factor can be calculated using the formula: (1+r)^n, where r is the discount rate (cost of capital) and n is the number of periods.
Present value factor = 1 / (1 + r)^n

Present value of cash flows = After-tax cash flow * Present value factor
Present value of cash flows = $840,000 * Present value factor (for 4 years)

Present value factor for 4 years at 10% = 1 / (1 + 0.1)^4 = 1 / (1.1)^4 = 0.683
Present value of cash flows = $840,000 * 0.683 = $574,920

5. Calculate the initial investment:
Initial investment = Cost of equipment + Increase in NWC
Initial investment = Cost of equipment + $40,000

We need to find the cost of equipment that makes the NPV equal to zero. To set up the equation:
NPV = Present value of cash flows - Initial investment
0 = $574,920 - (Cost of equipment + $40,000)

Rearranging the equation:
Cost of equipment = $574,920 - $40,000
Cost of equipment = $534,920

Therefore, the most the company should pay for the needed equipment is $534,920.