Question

Ch 13: Selected End-of-Chapter Problems - Capital Budgeting: Estimating Cash eBook Problem Walk-Through New-Project Analysis The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's RAD department. The equipment's basic price is $75,000, and it would cost another $17.500 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 $27,400. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts Inventory) of $2,800. The machine would have no effect on revenues, but it is expected to save the firm $24,550 per year in before tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40% 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-O net cash flow? b. What are the net operating cash flows in Years 1, 2, and 37 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 cash flow in Year 3 from NWC and salvage? d. If the project's cost of capital is 14%, what is the NPV of the project? Should the chromatograph be purchased?

Answer 1

rate positively ..

Ans a)	Year-0 cash flow
	Basic price of equipment		75000
	Modification cost		17500
	Working capital		2800
	Total cash outlflow		95300
	Answer =		-95300
Ans b)	Computation of operating cash flow
	year	1	2	3
	Saving in cost	24500	24500	24500
	Depreciation	30,830	41,116	13,699
	Profit before tax	(6,330)	(16,616)	10,801
	Tax @ 40%	(2,532.10)	(6,646.50)	4,320.30
	Profit after tax	(3,798.15)	(9,969.75)	6,480.45
	Cash flow	27,032	31,147	20,180
	Ans
	year 1	27,032
	year 2	31,147
	year 3	20,180
Ans c)	Computation of additional cash flow year 3
	Post tax salvage value			12,327
	(27400-(75000+17500)*(1-33.33%-44.45%-14.81%))*(1-40%)
	NWC release			2,800
	Cash flow in year 3 =			15,127
	Ans =	15,127
Ans d)	Computation of NPV
	Year	Cash flow	PVIF @ 14%	present value
	0	-95300	1.0000	(95,300)
	1	27,032	0.8772	23,712
	2	31,147	0.7695	23,966
	3	35,307	0.6750	23,831
	NPV =			(23,790)
	answer =	(23,790)
Ans e)	Should NOT PURCHASE, because NPV is negative