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 $71,000, and it would cost another $15,000 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 $28,000. 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 $3,350. The machine would have no effect on revenues, but it is expected to save the firm $28,200 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.

1. What is the Year-0 net cash flow?

   $  

2. 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:	$

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

   $  

4. If the project's cost of capital is 11%, what is the NPV of the project? .

   $  

   Should the chromatograph be purchased?

   -Select-YesNoItem 7

Answer 1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital
=-71,000-15000-3350
(89,350)	since outflow
b.Annual Cash Flows:
	Year 1	2	3
Savings in Cost	28,200	28,200	28,200
Less: Depreciation	28,664	38,227	12,737
Net Savings	-464	-10,027	15,463
Less: Tax @40%	-185.52	-4,010.80	6,185.36
Income after Tax	-278.28	-6,016.20	9,278.04
Add: Depreciation	28,664	38,227	12,737
Operating Cash Flow	28,385.52	32,210.80	22,014.64
Add: After tax salvage value			19,349.04
Recovery of Working capital			3,350
Additional cash flows			22,699
Total Cash Flow	28,385.52	32,210.80	44,713.68
Written down value	6,373
Sale price	28000
Gain on sale	21,627
Tax	8650.96
After tax salvage value	19349.04
c.NPV = Present value of cash inflows – present value of cash outflows
= 28,385.52*PVF(11%, 1 year) + 32,210.80*PVF(11%, 2 years) + 44,713.68*PVF(11%, 3 years) – 89,350
-4940.194144
No, should not be purchased (since NPV is negative)