New-Project Analysis The president of the company you work for has asked you to evaluate the proposed...

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New-Project Analysis
The president of the company you work for has asked you toevaluate the proposed acquisition of a new chromatograph for thefirm’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 byyour firm. The chromatograph, which falls into the MACRS 3-yearclass, would be sold after 3 years for $31,400. The MACRS rates forthe first 3 years are 0.3333, 0.4445 and 0.1481. Use of theequipment would require an increase in net working capital (spareparts inventory) of $2,880. The machine would have no effect onrevenues, but it is expected to save the firm $22,900 per year inbefore-tax operating costs, mainly labor. The firm's marginalfederal-plus-state tax rate is 40%. Cash outflows and negative NPVvalue, if any, should be indicated by a minus sign. Do not roundintermediate calculations. Round your answers to the nearestdollar.
What is the Year-0 net cash flow?
$
What are the net operating cash flows in Years 1, 2, and 3? Donot include recovery of NWC or salvage value in Year 3'scalculation here.
Year 1: $
Year 2: $
Year 3: $
What is the additional cash flow in Year 3 from NWC andsalvage?
$
If the project's cost of capital is 12%, what is the NPV of theproject? .
$
Should the chromatograph be purchased? select: ( yes / No)

Answer & Explanation Solved by verified expert

3.9 Ratings (428 Votes)

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

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Transcribed Image Text

New-Project AnalysisThe president of the company you work for has asked you toevaluate the proposed acquisition of a new chromatograph for thefirm’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 byyour firm. The chromatograph, which falls into the MACRS 3-yearclass, would be sold after 3 years for $31,400. The MACRS rates forthe first 3 years are 0.3333, 0.4445 and 0.1481. Use of theequipment would require an increase in net working capital (spareparts inventory) of $2,880. The machine would have no effect onrevenues, but it is expected to save the firm $22,900 per year inbefore-tax operating costs, mainly labor. The firm's marginalfederal-plus-state tax rate is 40%. Cash outflows and negative NPVvalue, if any, should be indicated by a minus sign. Do not roundintermediate calculations. Round your answers to the nearestdollar.What is the Year-0 net cash flow?$ What are the net operating cash flows in Years 1, 2, and 3? Donot include recovery of NWC or salvage value in Year 3'scalculation here.Year 1:$ Year 2:$ Year 3:$ What is the additional cash flow in Year 3 from NWC andsalvage?$ If the project's cost of capital is 12%, what is the NPV of theproject? .$ Should the chromatograph be purchased? select: ( yes / No)