You must evaluate a proposed spectrometer for the R&D department. The base price

Question

You must evaluate a proposed spectrometer for the R&D department. The base price is $240,000, and it would cost another $36,000 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 $120,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $44,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.

$284,000

2. 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 $_____________

Explanation / Answer

1.) Year 0 project cash flow = = 240000+36000+8000 = $ 284000

2.) Cash flow = Savings in labour costs - Depreciation - tax - Sold in the last year - tax

so, for Year 1,savings before tax = 44000-91080 = -47080 and Savings after tax and depreciation = 44000

so Year 1 cash flow = $44000

for Year 2, savings before tax = 44000-83214 = -39214 and Savings after tax and depreciation = 44000

so Year 2 cash flow = $44000

and for Year 3, savings before tax = 44000-15255 = 28745 and Savings after tax and depreciation = 44000, sales in last year = 120000 and tax cut on that = 13419.6

so Year 3 cash flow = $150580.4

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