New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2724414 • Letter: N
Question
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $80,000, and it would cost another $20,000 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 $32,000. 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 $60,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
(A)- 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.
$
(B)- What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.
in Year 1 $
in Year 2 $
in Year 3 $
Explanation / Answer
Details Year 0 Year 1 Year 2 Year 3 Investment in Spectrometer (80,000) Cost of Modification (20,000) Total Machine cost (100,000) Increase in NWC (14,000) a Net Cash Flow Year 0 (114,000) MACRS Rate 33% 45% 15% Macchine book value after year 3 @7% 7,000 Salvage value 32,000 Capital Gain 25,000 Tax on Cpital Gain @40% 10,000 b Annual Cash Flows Year 1-3 Before tax labor cost saving 60,000 60,000 60,000 Less : Depreciation = (33,000) (45,000) (15,000) Taxable income 27,000 15,000 45,000 Tax @40% (10,800) (6,000) (18,000) Post Tax Income 16,200 9,000 27,000 Add Back depreciation 33,000 45,000 15,000 Annual Cash flow from operations 49,200 54,000 42,000 Terminal Value Yr 3 Salvage 32,000 Less Tax on Capital Gain (10,000) NWOC return 14,000 Net Treminal Cash flow 36,000 Total Cash Flow (114,000) 49,200 54,000 78,000