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 $230,000, and it would cost another $46,000 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 $69,000. 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 $21,000 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.

$

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

Time line 0 1 2 3 Cost of equipment -230000 Installation cost -46000 Total investment in new machine -276000 Net working capital -11000 0 0 0 =Initial Investment outlay -287000 Savings in labor cost 21000 21000 21000 MACR rate 33.33% 44.45% 14.81% 7.41% -Depreciation MACR Rate* total investment -91990.8 -122682 -40875.6 -20451.6 =Salvage value = -70990.8 -101682 -19875.6 -taxes =(savings- depreciation)*(1-tax) -42594.48 -61009.2 -11925.36 +Depreciation 91990.8 122682 40875.6 =after tax operating cash flow 49396.32 61672.8 28950.24 Reversal of Net working capital 11000 Proceeds from sale of assets =selling price*(1 - tax rate) 41400 +Salvage book value * tax rate 8180.64 Terminal year non operating cash flows 60580.64 Total Cash flow for the period -287000.00 49396.32 61672.80 89530.88

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