Question

The president of your company, MorChuck Enterprises, has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $79,000, and it would cost another $17,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $26,200. The MACRS rates for the first three years are 0.3333, 0.4445 and 0.1481. (Ignore the half-year convention for the straight-line method.) Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,750. The machine would have no effect on revenues, but it is expected to save the firm $27,450 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar a. What is the Year-0 net cash flow? b. What are the net operating cash flows in Years 1, 2, and 3? (Note: Do not include recovery of NWC or salvage value in Year 3's calculation here.) Year 1: $ Year 2: $ Year 3: c. What is the additional (nonoperating) cash flow in Year 3? d. If the project's cost of capital is 13%, what is the NPV of the project? $ Should the chromatograph be purchased? -Select-

Answer 1

c) Additional Non-Operating Cash Flows salvage Value - $26,200 in Year? Add 2 Recovery of W. Capital $3,750 $29,950 dream... 2 Net Present value @ 13.1. Cost Initial outlay & 96,0vo PUIFAC 13%,1). 24,838 PUITA CB%,2 31,256 - capital 96,000 (21,980) (24,478) (16,731 (20,756) tortor PUIFA (131.3) 24,142 PUITA (131.,3). 29,950 Net Present Value - - $ 12,055 As the NPV of Chromatograph is - $ 12,055 it should not be purchased. But considering other factors tree market requirement in terms of technology, brand recognition should also be kept in wond while taking this decision

Answes Irutial Cost of the Chromatograph - $79,000 + $ 17,000 - 96,000 to (Note: This is because any expense incurred bring it to initial we is to be capitalized) a) Year 0 Net Cach How = - $ 96,000 6) Net Operating Cash Plouss: 1 2 3 Savings 27,450 27,450 27,450 Less: Excess tax to be borne by the (686230) (6,362.0) (6942.38) co.due to increased profits Add: saving in taxes 8,000 10,668 3,554 due to depreciation 1 96,800x 0.788 [96, 800xas (96.000 x0.25 x0.25 0.160 (3,750) Less Excess working Capital requirement Net cash flows $24.827.50 $312.33. 92 4.142
Answer to the question

Initial Cost of the chromatograph = $ 79,000 + $ 17,000 = $ 96,000

(Note : This is because any initial expense incurred by the company to bring it to use is to be capitalized)