In: Finance
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $280,000, and it would cost another $70,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $70,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $21,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.
In Year 1 $
In Year 2 $
In Year 3 $
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -350000 | ||||||
Initial working capital | -7000 | ||||||
=a. Initial Investment outlay | -357000 | ||||||
3 years MACR rate | 33.00% | 45.00% | 15.00% | 7.00% | |||
Savings | 21000 | 21000 | 21000 | ||||
-Depreciation | =Cost of machine*MACR% | -115500 | -157500 | -52500 | 24500 | =Salvage Value | |
=Pretax cash flows | -94500 | -136500 | -31500 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | -56700 | -81900 | -18900 | |||
+Depreciation | 115500 | 157500 | 52500 | ||||
=after tax operating cash flow | 58800 | 75600 | 33600 | ||||
reversal of working capital | 7000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 42000 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 9800 | |||||
=Terminal year after tax cash flows | 58800 | ||||||
b.Total Cash flow for the period | -357000 | 58800 | 75600 | 92400 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | ||
Discounted CF= | Cashflow/discount factor | -357000 | 53454.55 | 62479.34 | 69421.488 | ||
c. NPV= | Sum of discounted CF= | -171644.63 |
Reject as NPV is negative