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 $79,000, and it would cost another $19,000 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 $31,900. 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 $2,960. The machine would have no effect on revenues, but it is expected to save the firm $27,450 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.

1. What is the Year-0 net cash flow?

   $  

2. 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:	$

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

   $  

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

   $  

   Should the chromatograph be purchased?

   -Select-YesNo

Answer 1

Time line		0	1	2	3
Cost of new machine		-98000
Initial working capital		-2960
=a. Initial Investment outlay		-100960
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			27450	27450	27450
-Depreciation	=Cost of machine*MACR%	-32663.4	-43561	-14513.8	7261.8	=Salvage Value
=Pretax cash flows			-5213.4	-16111	12936.2
-taxes	=(Pretax cash flows)*(1-tax)	-3128.04	-9666.6	7761.72
+Depreciation			32663.4	43561	14513.8
=b. after tax operating cash flow			29535.36	33894.4	22275.52
reversal of working capital					2960
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)			19140
+Tax shield on salvage book value	=Salvage value * tax rate			2904.72
=c. Terminal year after tax cash flows					25004.72
Total Cash flow for the period		-100960	29535.36	33894.4	47280.24
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-100960	26608.43243	27509.4554	34570.90399
d. NPV=	Sum of discounted CF=	-12271.21

Reject as NPV is negative