The president of the company you work for has asked you to evaluate the proposed

Question

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment's basic price is $130,000, and it would cost another $19,500 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $45,500. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $7,800. The machine would have no effect on revenues, but it is expected to save the firm $52,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. What is the Year-0 net cash flow? If the answer is negative, use minus sign. $   What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar. Year 1 $   Year 2 $   Year 3 $   What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar. $  

Explanation / Answer

Total capitalized cost = 130,000 + 19,500 = 149,500

Book Value = 100 - (33.33% + 44.45% + 14.81%) = 7.41%

After-tax MV = 31,731

Before-tax annual benefit = 52,000

After-tax annual benefit = 52,000*0.6 = 31,200

The difference between OCF and non-OCF in 3rd year is After-tax MV

Non-OCF in 3rd year = 31,731

Investment 0 1 2 3 Initial cost -149,500 A MACRS 33.33% 44.45% 14.81% Depreciation 49,828 66,453 22,141 Tax saving on depreciation @ 40% 19,931 26,581 8,856 B Book Value (7.41% ) 11,078 Market Value 45,500 After-tax MV = MV - (MV - BV)*Tax 31,731 C Change in net WC -7,800 7,800 D Cash Flow (X) -157,300 19,931 26,581 48,388 sum A to D Operation Cash Flow (Y) 31,200 31,200 31,200 FCF (X + Y) -157,300 51,131 57,781 79,588 OCF 51,131 57,781 47,856 Non-OCF 31,731 C

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