New-Project Analysis The president of the company you work for has asked you to
ID: 2629263 • Letter: N
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 firms R&D department The equipment's basic price is $90,000, and it would cost another $13,500 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 $40,500. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,500. The machine would have no effect on revenues, but it is expected to save the firm $36,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 35%.
Explanation / Answer
1. Year-0 net cash flow= -108000
2. What are the net operating cash flows in Years 1, 2, and 3
3. additional (nonoperating) cash flow in Year 3=29,009+4500= 33509
4. If the project's cost of capital is 12%, should the chromatograph be purchased?
NPV = -108000 + 35,474/1.12 + 39,502/1.12^2+28,765/1.12^3 + 33509/1.12^3= -511
NPV is negative, the chromatograph should not be purchased
0 1 2 3 Initial Cost -103500 Annual cost savings 36000 36000 36000 Depreciation % 33.33% 44.45% 14.81% Depreciation (34,496.55) (46,005.75) (15,328.35) Net incmoe 977.2425 -6503.7375 13436.5725 Increase in NWC -4500 0 0 0 Net operating cash flow -108000 35,473.79 39,502.01 28,764.92 After tax Salvage value 29,009.27 Recovery of NWC 4500 Net cash flows -108000 35,473.79 39,502.01 62,274.20