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 $260,000, and it would cost another $39,000 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 $65,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $70,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent

Explanation / Answer

Note:

The depreciation is calculated using the rate given on the WDV of each year .

The tax advantage on loss of sale is also not considered.

Only cash flow for each year is taken. Not NPV

Year 0 1 2 3 Base Price -260000 Modification -39000 Working Capital Increase -11000 Tax savings on depreciation 39468 36059.4 6610.89 After tax cost savings 42000 42000 42000 Sale value 65000 Working Capital release 11000 Cash Flow -310000 81468 78059.4 48610.89 WDV 200330 110181.5 93654.275

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