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In: Finance

Problem 11-7 New-Project Analysis The president of the company you work for has asked you to...

Problem 11-7 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 $120,000, and it would cost another $30,000 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 $42,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,800. 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 30%. What is the Year-0 net cash flow? If the answer is negative, use minus sign. $ What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar. Year 1 $ Year 2 $ Year 3 $ What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar. $ If the project's cost of capital is 12%, should the chromatograph be purchased?

Please show all work/calculations!

Solutions

Expert Solution

Time line 0 1 2 3
Cost of new machine -150000
Initial working capital -4800
=Initial Investment outlay -154800
3 years MACR rate 33.33% 44.45% 14.81% 7.41% 0.0000%
savings 36000 36000 36000
-Depreciation =Cost of machine*MACR% -49995 -66675 -22215 11115 =Salvage Value
=Pretax cash flows -13995 -30675 13785
-taxes =(Pretax cash flows)*(1-tax) -9796.5 -21472.5 9649.5
+Depreciation 49995 66675 22215
=after tax operating cash flow 40198.5 45202.5 31864.5
reversal of working capital 4800
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 29400
+Tax shield on salvage book value =Salvage value * tax rate 3334.5
=Terminal year after tax cash flows 37534.5
Total Cash flow for the period -154800 40198.5 45202.5 69399
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928
Discounted CF= Cashflow/discount factor -154800 35891.518 36035.1563 49396.837
NPV= Sum of discounted CF= -33476.488

donot invest as NPV is negative


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