New-Project Analysis The president of the company you work for has asked you to
ID: 2750207 • 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 firm’s R&D department. The equipment's basic price is $170,000, and it would cost another $25,500 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 $76,500. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $6,800. The machine would have no effect on revenues, but it is expected to save the firm $68,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%.
What is the Year-0 net cash flow? If the answer is negative, use minus sign.
$
What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.
$
Explanation / Answer
Year - 0 Net Cash Flow
= Purchase Price of the Chromatograph + Modification Cost + Increase in Net Working Capital
= 170000 + 25500 + 6800
= -$202300
Net Operating Cash Inlfows:
Additional Non Operating Cash flows in year 3 = Sale of Chromatograph Post tax + Reversal of Net Working Capital
= [76500x(1-0.40)] + 6800
= $52700
Year Savings before depreciation (after tax) A Depreciation as per MACRS Tax Saving on Depreciation B Net Operating Cash Inflows A+B 1 40800 65160 26064 66864 2 40800 86900 34760 75560 3 40800 28954 11582 52382