Question

New-Project Analysis

The president of your company, MorChuck Enterprises, 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 $64,000, and it would cost another $19,500 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 $27,500. The MACRS rates for the first three years are 0.3333, 0.4445 and 0.1481. (Ignore the half-year convention for the straight-line method.) Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,000. The machine would have no effect on revenues, but it is expected to save the firm $22,840 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. 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? (Note: 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 (nonoperating) cash flow in Year 3?

   $  

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

   $  

   Should the chromatograph be purchased?

   -Select-YesNoItem

Answer 1

Question a:

Year 0 net cash flow is -$86,500

Question b:

Operating Cash Flow for Year 1 is $24,087.64

Operating Cash Flow for Year 2 is $26,408.94

Operating Cash Flow for Year 3 is $20,221.59

Question c:

Additional Cash Flow in Year 3 is $27,171.84

Question d:

NPV of the Project is -$7,169.20

Chromatograph should not be purchased since NPV<0

Calculation of Project's NPV
Particulars	Year 0	Year 1	Year 2	Year 3
Initial Investment
Chromatographer Price	-64000
Modification cost	-19500
Cost basis (A)	-83500
Working Capital required (B)	-3000
Net Investment (C = A+B)	-86500
Operating Cashflows
Saving in Pre tax Costs (D)		22840	22840	22840
Less: Depreciation(E) ($83,500 * 33.33%, 44.45%,14.81%)		27830.55	37115.75	12366.35
Profit Before tax (F = C-D-E)		-4990.55	-14275.75	10473.65
Less: Tax@25% (G = F*25%)		-1247.6375	-3568.9375	2618.4125
Profit After Tax (H = F-G)		-3742.9125	-10706.8125	7855.2375
Add back Depreciation ( I= E)		27830.55	37115.75	12366.35
Net Operating Cashflows (J = H+I)		24087.6375	26408.9375	20221.5875
Terminal Value
Salve value (K)				27500
Less: Unclaimed Depreciation (L)            ($83,500 *7.41%)				6187.35
profit before tax (M = K-L)				21312.65
Less: Tax@25% (N= M*25%)				5328.1625
Profit After Tax (O = M-N)				15984.4875
Add back Depreciation (P = L)				6187.35
Net Salvage value (Q = O+P)				24171.8375
Working capital realized (R )				3000
Net Terminal Value (S = Q+R)				27171.8375
Total Cashflows (T = C+J+S)	-86500	24087.6375	26408.9375	47393.425
Discount Rate @11% (U) (1+11%)^n n=0,1,2,3	1	0.90909091	0.826446281	0.751314801
Discounted Cashflows (V = T*U)	-86500	21897.8523	21825.56818	35607.38167
Net Present Value	-7169.20