New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2721779 • Letter: N
Question
New project analysis You must evaluate a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $16,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $44,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $59,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.
Explanation / Answer
Answer:
Base Price
($100,000.00)
Modification Charges
($16,500.00)
Change in working capital
($14,000.00)
Net Investment Outlay
($140,500.00)
Year
I
II
III
Earnings after tax savings
$35,400
$35,400
$35,400
Saving outflow (Depreciation Shield)
$16,698
$22,770
$7,590
Operating cash inflow
$52,098
$58,170
$42,990
Cost Spectrometer
$ 110,000 + $ 16,500
$126,500
Earning after-tax (Every Year)
$59,000(1-40%)
$35,400
Depreciation
$126,500 x 33%
$126,500 x 45%
$126,500 x 15%
$41,745
$56,925
$18,975
Saving outflow (Depreciation Shield)
$ 41,745 x 40%
$ 56,925 x 40%
$ 18,975 x 40%
$16,698
$22,770
$7,590
Salvage Values
$44,000
Tax on Salvage Value
($14,058)
Change in working capital
$14,000
Additional end-of-project cash flow
$43,942
Tax on Salvage Value
($44,000 - $8,855)x 40%
$14,058
Book Value of Spectrometer in 4th Year
$ 126,500 x 7%
$8,855
Base Price
($100,000.00)
Modification Charges
($16,500.00)
Change in working capital
($14,000.00)
Net Investment Outlay
($140,500.00)