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 $74,000,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 $33,500. 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 $3,500. The machine would have no effect onrevenues, but it is expected to save the firm $24,220 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 11%, what is the NPV of theproject? .
$
Should the chromatograph be purchased?
-Select-YesNoItem 7

Answer & Explanation Solved by verified expert

3.7 Ratings (330 Votes)

The cash flows and NPV are calculated as below book value of equipment at end of 3 years cost cumulativedepreciation See Answer

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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 $74,000,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 $33,500. 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 $3,500. The machine would have no effect onrevenues, but it is expected to save the firm $24,220 per year inbefore-tax operating costs, mainly labor. The firm's marginalfederal-plus-state tax rate is 40%. Cash outflows and negative NPVvalue, if any, should be indicated by a minus sign. Do not roundintermediate calculations. Round your answers to the nearestdollar.What is the Year-0 net cash flow?$ 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 11%, what is the NPV of theproject? .$ Should the chromatograph be purchased?-Select-YesNoItem 7