In: Finance
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!
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