Question

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%.

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? 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? Round your answer to the nearest dollar.
   $  
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 12%, should the chromatograph be purchased?
    -Select-YesNo

Please show work. Thank you!

Answer 1

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%
Profits			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