6. New project analysis You must evaluate the purchase of a proposed spectromete

Question

6. New project analysis

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $250,000, and it would cost another $37,500 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 $75,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $36,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

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. Negative amount should be indicated by a minus sign.
$ _______

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

INITIAL INVESTMENT: base price of the spectometer 250000 cost of modifications 37500 increase in net working capital 14000 initial investment outlay 301500 PROJECTS ANNUAL CASH FLOWS: YEAR - 1 YEAR - 2 YEAR - 3 savings in before tax labor costs 36000 36000 36000 depreciation (on $287500) 94875 129375 43125 increase in operating profit -58875 -93375 -7125 tax @ 40% -23550 -37350 -2850 after tax operating profit -35325 -56025 -4275 add: depreciation 94875 129375 43125 annual operating cash flows 59550 73350 38850 release of net working capital 14000 salvage value of the spectro meter 75000 tax @ 40% on gain on sale of $54875 -21950 (75000-20125) Projects annual cash flows 59550 73350 105900

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