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 $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 $31,500. 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 minus sign.
   $
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

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-90,000-13500-4500
(108,000)	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	36,000	36,000	36,000
Less: Depreciation	34,497	46,006	15,328
Net Savings	1,503	-10,006	20,672
Less: Tax @35%	526.21	-3,502.01	7,235.08
Income after Tax	977.24	-6,503.74	13,436.57
Add: Depreciation	34,497	46,006	15,328
b.Operating Cash Flow	35,473.79	39,502.01	28,764.92
Add: After tax salvage value			23,159.27
Recovery of Working capital			4,500
c.Additional cash flows			27,659
Total Cash Flow	35,473.79	39,502.01	56,424.20
Working Note:
Written down value	7,669
Sale price	31500
Gain on sale	23,831
Tax	8340.7275
After tax salvage value	23159.2725