Question

You must evaluate the purchase of a spectiomater for the R&D deparmet. the base price is $140,000 and it would cost another $30,000 to modifly the equpment for speical use by the firm. the equipment falls into the MACRS 3years class and would be sold after 3 years for 60,000. The applicable deprecation rates are 33% 45% 15 % and 7% as disccussed in Appendix 12A the equpiment would require an $8,000 increase in net operating working captial (spare parts inventory) the project would have no effecrs on revenues. nut it should save the firm $50,000 per year in before tax labor costs. the firms marginal ferderal plus state tax rate is 40% the firm WACC hurdle rate or required rate of return is 12%

what is the sale of the equipment in year 3?

Answer 1

Tax rate	40%
	Year-1	Year-2	Year-3
saving	50,000	50,000	50,000
Less: Depreciation as per table given below	56,100	76,500	25,500
Profit before tax	(6,100)	(26,500)	24,500
Tax	(2,440)	(10,600)	9,800
Profit After Tax	(3,660)	(15,900)	14,700
Add Depreciation	56,100	76,500	25,500
Cash Profit After tax	52,440	60,600	40,200
Cost of macine		170,000
Depreciation		158,100
WDV		11,900
Sale price		60,000
Profit/(Loss)		48,100
Tax		19,240
Sale price after tax		40,760
Depreciation	Year-1	Year-2	Year-3			Total
Cost	170,000	170,000	170,000
Dep Rate	33.00%	45.00%	15.00%
Deprecaition	56,100	76,500	25,500			158,100
Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 12%	Present values
0	(170,000)	(8,000)		(178,000)	1.000	(178,000)
1			52,440	52,440	0.893	46,821
2			60,600	60,600	0.797	48,310
3	40,760	8,000	40,200	88,960	0.712	63,320
				Net Present Value		(19,549)