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 $190,000, and it would cost another $28,500 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 $47,500. 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 $11,400. The machine would have no effect on revenues, but it is expected to save the firm $57,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. a. What is the Year O net cash flow? If the answer is negative, use parentheses. (229,900) b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1 $ 63,330 Year 2 $ 73049 Year 3 47144 C. What is the additional (nonoperating) cash flow in Year 3? Do not round intermediate calculations. Round your answer to the nearest dollar. 76000

Answer 1

Here :

Ans a )

Year Zero Net Cash Flow = Equipment Base Price + Modification Cost + Increase in Working Capital
= 229,900 (Ans a) It will be - Ve Value

04. MACRS Schedule given as in Question

05. Depreciation = Equipment Price allowed for depreciation * Depreciation as per schedule

Equipment Price allowed for depreciation = Equipment Base Price + Modification Cost
6. Tax Savings = Tax Rate ( 40%) * Depreciation

7.Savings due to New Machines (After Tax) = Beforetax Savings due to new m/c * Tax Rate = 57000 * 0.4

8. Operating Cash Flow = Tax Savings + Savings due to New Machines

Ans b : Operating Cash Flow

Year 01 = 63,330

Year 02 = 73049

Year 03 = 47144

Ans C :

Total Depreciation Till Year 03

= Cummulative Depriciation Till Year 03 * Equipment Price allowed for depreciation

= (0.3333 + 0.4445+  0.1481) * (190000+ 28500) = 202,309.15

Book Value of Machine = Equipment Price allowed for depreciation - Total Depreciation Till Year 03

= (190000+ 28500) - 202,309.15 = 16190.85

Selling Price = 47500

Tax Payble   =(Selling Price -Book Value of Machine )*0.4 = 12523.66

Amount of Net Additional Cash flow = Selling Price - Tax Payble = 47500 - 12,523.66 = 34976.34