Question Problem 12-8 New project analysis You must evaluate a proposed spectrom

Question

Question Problem 12-8 New project analysis You must evaluate a proposed spectrometer for the R&D department. The base price is $70,000, and it would cost another $10,500 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 $17,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $23,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

A. 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. $

B. 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 $

* NEED HELP!! I can not get year 3 in part B. that is the only one I need!!

Explanation / Answer

Answer:B

* The after-tax cost savings is $23,000(1 – T) = $23,000(0.6)

= $13,800

*Tax on SV = ($17,500 - $5,635)(0.4) = $4746

Year 1 2 3 *After-tax savings 13800 13800 13800 Depreciation shield 10626 14490 4830 Return of NWC 10000 Net salvage value 12754 annual cash Flow 24426 28290 41384 Depreciation 26565 36225 12075 Depreciation shield 10626 14490 4830 Salvage value 17500 Tax on salvage value 4746 Net salvage value 12754

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