Question

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 R&D department. The equipment's basic price is $65,000, and it would cost another $18,000 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 $29,800. 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 $2,400. The machine would have no effect on revenues, but it is expected to save the firm $21,900 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.

1. What is the Year-0 net cash flow?

   $ ???

2. What are the net operating cash flows in Years 1, 2, and 3? Do not include recovery of NWC or salvage value in Year 3's calculation here.

   Year 1:	$ ???
   Year 2:	$ ???
   Year 3:	$ ???

3. What is the additional cash flow in Year 3 from NWC and salvage?

   $ ???

4. If the project's cost of capital is 10%, what is the NPV of the project? .

   $ ???

Answer 1

C3 : r X C fix D =83000*33.33% E A B F G H I J K L M. Como Cost 1 Year savings 2 o 3 1 $ 21,900 4 2 $ 21,900 5 3 $ 21,900 Depreciati Net Depreciati Operating Net working Free Cash PVIF@ on PBT Tax@40% income on cash flows capital Investment flows 10% $ (2,400) $ (83,000) $ (85,400)| 1.000 $ 27,664 $ (5,764) $ (2,306) $ (3,458) $ 27,664 $ 24,206 $ 24,206 0.909 $ 36,894 | $(14,994) $ (5,997) $ (8,996) $ 36,894 $ 27,897 | $ 27,897 0.826 $ 12,292 $ 9,608 $ 3,843 $ 5,765 $ 12,292 $ 18,057 $ 2,400 $ 20,340 $ 40,797 0.751 Present value $85,400| $22,005 $23,056 $30,651 $ (9,688) Year 0 -85400 Asset cost Less: Depreciation charged $ 83,000 $ 76,850 $ 6,150 $ 29,800 WDV at the time of sale FF Sale value of machine Year 1 Year 2 Year 3 24206 27897 18057 Profit/(Loss) on sale Less: Tax @40% $ 23,650 $ 9,460 Addl. Year 3 Cash flow After tax cash salvage value $ 20,340 22740 NPV -9688

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