Question

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 $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 $40,500. 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 $4,500. The machine would have no effect on revenues, but it is expected to save the firm $36,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 35%.

1. What is the Year 0 net cash flow? If the answer is negative, use parentheses.
   $
2. 
   
3. 
   
4. 
   
5. 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	$

6. 
   
7. What is the additional (nonoperating) cash flow in Year 3? Do not round intermediate calculations. Round your answer to the nearest dollar

Answer 1

Year 0 net cash flow = equipment's basic price + modification cost + working capital investment = - $90,000 - $13,500 - $ 4,500 = - $ 108,000 =  (108,000)

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Net Operating cash flows for year 1 , 2 & 3:

please see the table below. Yellow colored cells contain our answers:

Year		0	1	2	3
Equipment's cost + modification cost	A	(103,500)
Depreciation rate	d		0.3333	0.4445	0.1481
Cost saving	B		36,000	36,000	36,000
Depreciation	D = A x d		(34,497)	(46,006)	(15,328)
Operating profit	E = B + C + D		1,503	(10,006)	20,672
NOPAT	F = E x (1 - 35%)		977	(6,504)	13,437
Net Operating Cash flows	G = F - D		35,474	39,502	28,765

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Additional non operating cash flows in year 3 = Post tax salvage value + Release of working capital

Book value after three years = undepreciated portion = (1 - accumulated depreciation rates over 3 years) x initial cost = (1 - 0.3333 - 0.4445 - 0.1481) x (90,000 + 13,500) = 7,669

Sale value = 40,500

Gain on sale = 40,500 - 7,669 =  32,831

Tax on gain = 35% x  32,831 =  11,491

Hence, post tax salvage value = sale value - tax on gain = 40,500 - 11,491 = $  29,009

Additional non operating cash flows in year 3 = Post tax salvage value + Release of working capital = 29,009 + 4,500 = $ 33,509