Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $250,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $103,000. The equipment would require a $6,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $60,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.

What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1: $

Year 2: $

Year 3: $

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital - Tax savings on depreciation
=250000+6000- 250,000*25%
=$193500
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	60,000	60,000	60,000
Less: Depreciation	0	0	0
Net Savings	60,000	60,000	60,000
Less: Tax @25%	15,000.00	15,000.00	15,000.00
Income after Tax	45,000.00	45,000.00	45,000.00
Add: Depreciation	0	0	0
Cash Flow	45,000.00	45,000.00	45,000.00
Add: After tax salvage value			77,250.00
Recovery of Working capital			6,000
Cash Flow	45,000.00	45,000.00	128,250.00