You must evaluate the purchase of a proposed spectrometer for the R&D department

Question

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 $50,000 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 $112,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $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 $27,000 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

Answer:

calculation of depreciation at the specified rate after taking the total cost of machinery i.e =250000+50000=$300000

Net income= -depreciation + saving - taxes + salavage value of equipment

Net cash flow(in $) 0 1 2 3 Intital investment 250000 50000 cost of net working capital 10000 depreciation 135000 45000 21000 sold of machinery 112500 saving 27000 27000 27000 net income -310000 -108000 -18000 118500 tax 0 0 47400 net cash flow -108000 -18000 71100

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