New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2764830 • Letter: N
Question
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $47,500 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 $47,500. 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 $49,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
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
Year 1 2 3 Savings in Cost a $49,000 $49,000 $49,000 Post tax savings in cost b = a*0.6 $29,400 $29,400 $29,400 Depreciation Rate c 33% 45% 15% Depreciation Amount d = $237500 * b $78,375 $106,875 $35,625 Depreciation Tax Shield e = d*0.4 $31,350 $42,750 $14,250 Post tax salvage value of machine f = Note 1 $0 $0 $35,150 Realization of Working Capital g $0 $0 $12,000 Annual Cashflows b+e+f+g $60,750 $72,150 $90,800 Cost of Machine(190000 + 47500) $237,500 Less: Accumulated Depreciation $220,875 Book Value (a) $16,625 Realizable Value (b) $47,500 Gain on Realization (c = b-a) $30,875 Tax on Gain (d = c*40%) $12,350 Post Tax Salvage Value (b-d) $35,150