Question

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 $65,000, and it would cost another $20,000 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 $30,300. The MACRS rates for the first three years are 0.3333, 0.4445 and 0.1481. (Ignore the half-year convention for the straight-line method.) Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,050. 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 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? 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: Year 2: Year 3: c. What is the additional (nonoperating) cash flow in Year 3? d. If the project's cost of capital is 11%, what is the NPV of the project? Should the chromatograph be purchased? -Select-

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $30,300.00 $6,298.50 $24,001.50 less: $21,900.00 $28,330.50 -$6,430.50 -$1,607.63 -$4,822.88 $28,330.50 $23,507.63 $21,900.00 $37,782.50 -$15,882.50 $3,970.63 -$11,911.88 $37,782.50 $25,870.63 $21,900.00 $12,588.50 $9,311.50 $2,327.88 $6,983.63 $12,588.50 $19,572.13 add: salvage value less: tax on gain after tax salvage value $30,300.00 $6,000.38 $24,299.63 YEAR Savings depreciation EBT tax @25% EAT depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 11% PRESENT VALUE NPV -$85,000.00 -$3,050.00 $3,050.00 -$88,050.00 $23,507.63 0.90090 $21,178.04 1 $24,299.63 $46,921.75 0.73119 $34,308.78 $25,870.63 0.81162 $20,997.18 -$88,050.00 $11,566.00 year 0 cash flow = Iyear 1 year 2 lvear 3 Additional cash flow NPV NO -$88,050 $23,508 $25,871 $19,572 $27,350 $11,566.00