Question

The VP 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 $90,000, and it would cost another $13,500 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 $22,500. The MACRS rates for the first 3 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 $3,600. The machine would have no effect on revenues, but it is expected to save the firm $27,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%.

a. What is the Year 0 net cash flow? If the answer is negative, use parentheses.

b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1: $

Year 2: $

Year 3:$

c. What is the additional (nonoperating) cash flow in Year 3? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

	(a)	YEAR 0 NET CASH FLOW
		Cash flow for Equipment basic price	($90,000)
		Cash flow for Equipment modification	($13,500)
		Total cash flow for equipment	($103,500)
		Cah flow for Increase in Net Working Capital	($3,600)
		Total Year 0 Net Cash flow	($107,100)
		Tax Rate=40%=0.4
	(b)	OPERATING CAH FLOWS
	N	Year	1	2	3
	a	Expected before tax Savings in operating costs	$27,000	$27,000	$27,000
	b=a*(1-0.4)	After tax savings	$16,200	$16,200	$16,200
	c	MACRS 3-year Deprectiation Rate	0.3333	0.4445	0.1481
	d=c*103500	Depreciation expenses	$34,497	$46,006	$15,328
	e=d*40%	Depreciation Tax Shield	$13,799	$18,402	$6,131
	f=b+e	Total after tax Operating Cash Flow	$29,999	$34,602	$22,331
	g	Accumulated Depreciation	$34,497	$80,502	$95,831
		Operating Cash Flow	$29,999	$34,602	$22,331
		Year 1	$29,999
		Year 2	$34,602
		Year 3	$22,331
	c.	Additional Non Operating Cash Flow in Year3
		Before tax Salvage Value	$22,500
		Accumulated Depreciation at end of 3 years	$95,831
		Book value at end of 3 years	$7,669	(103500-95831)
		Gain on salvage	$14,831	(22500-7669)
		Tax Saving on Gain =14831*40%	$5,932
		After tax Salvage Cash inFlow	$16,568	(22500-5932)
		Release of additional net working capital	$3,600
		Additional Non Operating Cash Flow in Year3	$20,168	(16568+3600)