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 $68,000, and it would cost another $16,500 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 $29,900. 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 $3,880. The machine would have no effect on revenues, but it is expected to save the firm $26,320 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.

a) What is the Year-0 net cash flow?

$

b) 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: $

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

$

d) If the project's cost of capital is 10%, what is the NPV of the project?

$

Should the chromatograph be purchased?

Answer 1