Please show Calculations: Question 2. (15 points) Pierre Imports is evaluating t

Question

Please show Calculations:

Question 2. (15 points) Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $900,000. In addition the equipment would require modifications at a cost of $50,000 plus shipping costs of $10,000.    The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $100,000. The equipment would require increased net working capital of 60,000.   The equipment is expected to save the company $70,000 per year in before-tax operating costs. The company's marginal tax rate is 35 % and its cost of capital is 11%.

a. What is the cash outflow at Time 0?

b. Calculate net operating cash flows in years 1, 2, and 3? (MACRS 3 year class: 0.3333, 0.4445, 0.1481, 0.0741)

b. Calculate net operating cash flows in years 1, 2, and 3?

Explanation / Answer

Installed cost of the equipment = $ ( 900,000 + 50,000 + 10,000) = $ 960,000.

a. Cash outflow at Time 0 = Installed cost of equipment + additional working capital needs = - $ 960,000 - $ 60,000 = - $ 1,020,000.

b. Net Operating Cash Flows:

Year 1 Year 2 Year 3 Annual Savings $ 70,000 $ 70,000 $ 70,000 Annual Depreciation 319,968 426,720 142,176 Operating Cash Flows After Tax 157,489 194,852 95,262 Working Capital Released 60,000 Salvage Value After Tax 89,898 Total Operating Cash Flows $ 157,489 $ 194,852 $ 245,160

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