Question

New-Project Analysis

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 $76,000, and it would cost another $18,500 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 $30,600. 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 $4,360. The machine would have no effect on revenues, but it is expected to save the firm $29,440 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

What is the Year-0 net cash flow?

$

What are the net operating cash flows in Years 1, 2, and 3? Do not include recovery of NWC or salvage value in Year 3's calculation here.

Year 1:$

Year 2:$

Year 3:$

What is the additional cash flow in Year 3 from NWC and salvage?

$

If the project's cost of capital is 11%, what is the NPV of the project? .

$

Should the chromatograph be purchased?

-Select- Yes or No

Answer 1

a. Year 0 net cash flow : - $ 98,860

Installed cost of equipment = $ 76,000 + $ 18,500 = $ 94,500

Total initial investment = $ 94,500 + $ 4,360 = $ 98,860

b.

	Net Operating Cash Flows
Year 1	$ 30,263
Year 2	34,466
Year 3	23,262

c.Additional cash flows in Year 3 from NWC and salvage value: $ 25,521

Annual operating cash flows = EBITDA x ( 1 - t ) + Depreciation x t

Year 1 operating cash flows = $ 29,440 x 0.60 + $ 94,500 x 0.3333 x 0.4 = $ 30,262.74

Year 2 operating cash flows = $ 29,440 x 0.60 + $ 94,500 x 0.4445 x 0.4 = $ 34,466.10

Year 3 operating cash flows = $ 29,440 x 0.60 + $ 94,500 x 0.1481 x 0.4 = $ 23,262.18

After tax salvage proceeds = $ 30,600 [ {$ 30,600 - $ ( 94,500 x 0.0741) } x 0.40] = $ 30,600 - $ 9,439 = $ 21,161

Additional cash flows in Year 3 = $ 21,161 + $ 4,360 = $ 25,521

d. NPV : - $ 7,953

	0	1	2	3
Initial investment	$ ( 98,860)
Operating cash flows		$ 30,262.74	$ 34,466.10	$ 23,262.
Additional cash flows				25,521
Totals	(98,860)	30,263	34,466	48,783.00
PV factor at 11 %	1.0000	0.9009	0.8116	0.7312
Present Values	(98,860)	27,264	27,973	35,670
NPV	(7,953)

e. . No.