Question

Please use Excel spreadsheets to analyze problems EI, E2, and E3. On the spreadsheet please show all inputs and work clearly. Attach the spreadsheet output with the rest of your homework. E1) The Harris Company is evaluating the proposed acquisition of a spectrometer for the firm's R&D department. The equipment's base price is $140,000, and it would cost another $30,000 to modify it for special use by the firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $60,000. Use of the equipment would require an increase in net working capital of $8,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. a) What is the net cost of the spectrometer? (i.e., what is the Year 0 net cash flow?) b) What are the net operating cash flows in Years 1, 2, and 3? c) What is the additional (non-operating) cash flow in Year 3? d) If the firm's cost of capital is 12%, should the spectrometer be purchased?

Answer 1

8 9 10 base price modifying cost working capital total intial cost 140000 30000 8000 178000 11 12 13 years slavage value - 14 60000 15 16 Depriciation 36666.66667 17 18 19 20 21 22 23 cash flow from year 1,2,3 saving in cost 50000 depriciation 36666.66667 benifit before tax 13333.33333 tax $5,333.33 net profit $8,000.00 depriciation $36,666.67 net operating flow $44,666.67 Non operating cashflow year-3 salvage value 60000 working capital 8000 total flow 68000 24 25 26 27 28 29 30 31 32 33 year 1 Year 2 Year 3 Net Cash flow $44,666.67 $44,666.67 $112,666.67 ($22,317.15) 34 35 NPV 36

Formulas used

TOTAL INITIAL COST =SUM(C9:C11)

Depriciation =(C9+C10-C14)/C13

Tax =C21*0.4

Year - 3 total ( operating+ non operating flow) = C25+C29

NPV =(0.12,C32:C34)-C12

ANSWERS

(a) 178,000 ref. Cell no C12

(b) 44666.67 ref. Cell no. C25

(c) 68000 ref. Cell no. C29

(d) No spectrometer should not be purchase because present value of benefits is less than present vaule of cost incurred for spectrometer. Here NPV (ref. Cell no. C35) is negative so spectrometer should not be purchase.

I hope my efforts will be fruitful to you...?