Problem 12-8 New project analysis You must evaluate a proposed spectrometer for
ID: 2751591 • Letter: P
Question
Problem 12-8
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $220,000, and it would cost another $44,000 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 $66,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $37,000 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.
in Year 1 $
in Year 2 $
in Year 3 $
Explanation / Answer
Solution:
A).Initial Investment outlay :
Cost of Machine : $( 2,64,000)
Net working Capital : $ (12,000)
:$ (2,76,000)
B).OperatingCash flows for project:
Year 1 Year 2 Year 3 EBIT 37,000 37,000 37,000 Less: Tax @40% 14,800 14,800 14,800 EAT 22,200 22,200 22,200 Add: Depreciation 87,120(2,64,000*33%) 1,18,800(264000*45%) 39600(264000*15%) Operating cash flows 1,09,320 1,41,000 61,800