Thoma Pharmaceutical Company may buy DNA-testing equipment costing $60,000. This equipment is expected to reduce labor costs of the clinical staff by $20,000 annually. The equipment has a useful life of five years but falls in the three-year property class for cost recovery (depreciation) purposes. No salvage value is expected at the end. The corporate tax rate for Thoma (combined federal and state) is 38 percent, and its required rate of return is 15 percent. (If profits after taxes on the project are negative in any year, the firm will offset the loss against other firm income for that year.) On the basis of this information, what are the relevant cash flows?

Initial investment = $60,000Calculation of depreciation: Year Depreciable amount Depreciation rate Depreciation 1 $ 60,000 33.33% $ 19,998 2 $ 60,000 44.45% $ 26,670 3 $ 60,000 14.81% $ 8,886 4 $…