Question

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 $160,000, and it would cost another $24,000 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 $72,000. 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 $6,400. The machine would have no effect on revenues, but it is expected to save the firm $48,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the Year 0 net cash flow? If the answer is negative, use parentheses.
   $
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.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 10%, should the chromatograph be purchased?
    Yes or No

A project has an initial cost of $56,200, expected net cash inflows of $14,000 per year for 9 years, and a cost of capital of 11%. What is the project's payback period? Round your answer to two decimal places.

Answer 1

Question 1:

> Year 0 net Cash Flow is -$190,400

> Net Operating Cash Flow

Year 1 is $53,330.88

Year 2 is $61,515.2

Year 3 is $39,700.16

> Additonal Cash Flow in Year 3 is $55,053.76

> NPV of the Project is -$19,888.35. No, Chromatograph can not be purchased since NPV is negative

Calculation of NPV of the Project
Particulars	0	1	2	3
Initial Investment
Equipment base price	-160000
Cost of Modification	-24000
Investment in Working Capital	-6400
Net Investment (A)	-190400
Operating Cash Flows
Saving in Operating Costs (B)		48000	48000	48000
Depreciation (C ) $184,000 * 0.3333, 0.4445, 0.1481		61327.2	81788	27250.4
Profit Before Tax (D = B-C)		-13327.2	-33788	20749.6
Tax @40% (E = D*40%)		-5330.88	-13515.2	8299.84
Profit After Tax (F = D-E)		-7996.32	-20272.8	12449.76
Depreciation (G = C)		61327.2	81788	27250.4
Net Operating Cash Flows (I = F+G)		53330.88	61515.2	39700.16
Terminal Value
Sale Value (J)				72000
Less: Unclaimed Depreciation (K) $184,000 * 0.0741				13634.4
Profit on Sale (L = J-K)				58365.6
Tax @30% (M = L*40%)				23346.24
After Tax Sale Value (N = J-M)				48653.76
Recovery of Working Capital (O)				6400
Net Terminal Value (P = N+O)				55053.76
Total Cash Flows (Q = A+I+P)	-190400	53330.88	61515.2	94753.92
Discount Factor @10% (R ) 1/(1+10%)^n n=0,1,2,3	1	0.909090909	0.826446281	0.751314801
Discounted Cash Flows (S = Q*R)	-190400	48482.61818	50839.00826	71190.02254
NPV of the Project	-19888.35101

Calculation of Payback Period
Year	Cash Flow	Cumulative Cash Flows
0	-56200	-56200
1	14000	-42200
2	14000	-28200
3	14000	-14200
4	14000	-200
5	14000	13800
6	14000	27800
7	14000	41800
8	14000	55800
9	14000	69800
Payback Period =	Completed Years +	Unrecovered amount at the start of the year
Cash Flow during the year
	=	4 years + ($200 / $14,000)
	=	4 years + 0.014285714 years
	=	4.01 years
Therefore, payback Period of the project is 4.01 years