Problem 12-8 New project analysis You must evaluate a proposed spectrometer for
ID: 2751596 • Letter: P
Question
Problem 12-8 New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $250,000, and it would cost another $37,500 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 $100,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $72,000 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. $ 292500 What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. in ]
Year 1 $ 81150
Year 2 $ 94950
Year 3 $ = ?????
Explanation / Answer
Answer: Calculation of the initial investment outlay for the spectrometer:
The net cost of the spectrometer is 287500 ( 250,000 plus 37500)
The Year 0 project cash flow is 292500. (287500 plus spare parts inventory of 5000)
Answer: Calculation of the project's annual cash flows in Years 1, 2, and 3:
Particulars 1 2 3 Cost saving before tax 72000 72000 72000 Less Depreciation 61875 84375 28125 Less Amortization Spare Parts 1667 1667 1666 Net Income after depreciation/amortization 8458 -14042 42209 Gain onSale of equipment at year 3 86875 100000-13125 Total Income 8458 -14042 129084 Income Tax 40% 3383.2 -5616.8 51633.6 Net Income after Tax 5074.8 -8425.2 77450.4 Add: non cash charges depreciation/amortization 63542 86042 29791 Total income after tax 68616.8 77616.8 107241.4 add: Sale of equipment book value 13125 Net annual cash flow 68616.8 77616.8 120366.4