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 $77,000, and it would cost another $14,000 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 $31,400. 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 $2,880. The machine would have no effect on revenues, but it is expected to save the firm $22,900 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 12%, what is the NPV of the project? .

   $  

   Should the chromatograph be purchased? select: ( yes / No)

Answer 1

Time line		0	1	2	3
Cost of new machine		-91000
Initial working capital		-2880
=a. Initial Investment outlay		-93880
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			22900	22900	22900
-Depreciation	=Cost of machine*MACR%		-30330.3	-40449.5	-13477.1	6743.1	=Salvage Value
=Pretax cash flows			-7430.3	-17549.5	9422.9
-taxes	=(Pretax cash flows)*(1-tax)		-4458.18	-10529.7	5653.74
+Depreciation			30330.3	40449.5	13477.1
=b. after tax operating cash flow			25872	29920	19131
reversal of working capital					2880
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				18840
+Tax shield on salvage book value	=Salvage value * tax rate				2697.24
=c. Terminal year after tax cash flows					24417
Total Cash flow for the period		-93880	25872.12	29919.8	43548.08
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928
Discounted CF=	Cashflow/discount factor	-93880	23100.11	23851.88	30996.663
d. NPV=	Sum of discounted CF=	-15931

Reject project as NPV is negative