Question

New-Project Analysis 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 $80,000, and it would cost another $15,500 to modify it for special use by your firm. The chromatograph, which is into the MACRS 3-year class, would be sold after 3 years for $34,600. The MACRS rates for the first three years are 0.3333, 0.4445 and 0.1481. (gnore the half year convention for the straight-line method.) Use of the equipment would require an increase in networking capital (spare parts inventory) of $3,800. The machine would have no effect on revenues, but it is expected to save the firm $24,600 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-O net cash flow? $ 80000® 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: 26724 Year 2: 294853 Year 3: 221 22 c. What is the additional (nonoperating) cash flow in Year 3? $ 29750 d. If the project's cost of capital is 14%, what is the NPV of the projet? Should the chromatograph be purchased? Select

Answer 1

Solution: A) Year O net cash flow cost of machine Installation cost increase in net working capital Year Onet cash flow -80000 -15500 -3800 -99300 (negative sign represent cash outflow! 1 / 18,450 2 18,450 18,450 B) net operating cash flow after tax savings =24600*(1-0.25) tax shiled on depreciation = (80000+15500) *Depreciation rate * tax rate net operating cash flow 7,958 26,408 10,612 29,062 3,536 21,986 C) additional (nonoperating) cash flow in Year 3 after tax salvage value* recapture of working capital additional (nonoperating) cash flow in Year 3 year 3 27,719 3,800 31,519 95,500 after tax sale value * cost=80000+ 15500 LESS : accumulated depreciation = 95500*(0.3333+0.4445+0.1481) book value sale value Gain on sale Tax on gain=27523*0.25 after tax sale value 88,423 7,077 34,600 27,523 6,881 27,719 0 -99300 1 2 3 26408 29062 D) Calculation of NPV Initial Investment net operating cash flow additional (nonoperating) cash flow in Year 3 net cash flow discount factor at 14% -99300 1.00000 99,300.00 17,659 2 6408 0.87719 23,164.51 29062 0.76947 22,362.60 21986 31519 53505 0.67497 36,114.37 PV NPV - should the chromatograph be purchased? No, as it has negative NPV.