Question 19 (16 points) You have been asked by the president of your own company

Question

Question 19 (16 points) You have been asked by the president of your own company to evaluate the proposed acquisition of a new chromatograph for the firm's R&D; department. The equipment's basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The Chromatograph, which falls into the MACRS 3-year class (MACRS schedule: year 1 -0.333, year 2- 0.445, year 3 - - 0.148), would be sold after 3 year for $30,000. Use of the equipment would require an increase in net working capital (NWC) of $4,000 only once at the beginning. The chromatograph would have incurred before tax operating costs of 3,000, but it is expected to increase the revenue by $28,000 per year. The firm's marginal tax rate is 40%. What is the year-0 net cash flow (including net working capital investments)? A What are the net operating cash flows in year 1? A What is the additional (non- operating) cash flow in year 3 (termination cash flow including the recovery of NWC). Ar Save

Explanation / Answer

1. Cash flow for Year 0 = -89000

2. Cash flow for Year 1 =26322

3. Cash flow for Year 3 = 41032


Best of Luck. God Bless

Year 0 1 2 3 Equipement base price -70000 Modification cost -15000 Increase in NWC -4000 Increase in Revenue 28000 28000 28000 Operating Costs 3000 3000 3000 Depreciation rate 0.333 0.445 0.148 Depreciation=(Equipment price+modiication Cost)*Depreciation Rate 28305 37825 12580 EBIT=Revenue-Operating Expenses-Depreciation -3305 -12825 12420 Tax = EBIT*Tax Rate -1322 -5130 4968 Net Income= EBIT-Taxes -1983 -7695 7452 Depreciation 28305 37825 12580 Recovery of NWC 3000 After Tax Salvage Value 18000 Cash Flow=Net Income+Depreciation +NWC recovery +after tax salvage Value -89000 26322 30130 41032

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