Question

NEW PROJECT ANALYSIS

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $28,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $85,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $65,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $

   In Year 2 $

   In Year 3 $

Answer 1

C3 x C fix D =218500*0.33 E A B F G H I J K Cost savings Deprecia tion 1 Year 0 Net Depreciat Operating | Net working Annual PBT Tax@40% income ion cash flows capital Investment Cash flows $ 9,000) $ (218,500) $ (227,500) $ (7,105) $ (2,842) $ (4,263) $ 72,105 $ 67,842 | $ 67,842 $ (33,325) $ (13,330) $(19,995) $ 98,325 $ 78,330 $ 78,330 $ 32,225 $ 12,890 $ 19,335 $ 32,775 $ 52,110 $ 9,000 $ 57,418 $ 118,528 3. 1 $ 65,000 $72,105 2 $ 65,000 $98,325 3 $ 65,000 $32,775 Year 0 -$227,500 Asset cost Less: Depreciation charged $ 218,500 $ 203,205 WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @40% After tax cash salvage value $ 15,295 $ 85,500 $ 70,205 $ 28,082 $ 57,418 Year 1 Year 2 Year 3 $ 67,842 $ 78,330 $ 118,528

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