New project analysis You must evaluate a proposed spectrometer for the R&D depar

Question

New project analysis

You must evaluate a proposed spectrometer for the R&D department. The base price is $280,000, and it would cost another $42,000 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 $126,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $44,000 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

1) Cash outflow in year 0 = Base price + Cost to modify +Working capital requirement

= 280000+42000+13000

= 335000

Cost of spectometer = Base price + Modifications

Depreciation in year 1 = 33%*322000 i.e 106260

Depreciation in year 2 =45%*322000 i.e 144900

Depreciation in year 3 =15%*322000 i.e 48300

Value of machine after 3 years = 322000-106260-144900-48300 i.e 22540

Gain on sale of machinery after 3 years = 126000-22540 i.e 103460

Calculation of cash inflows

Year 1 = Savings in cost ( net of tax ) +Savings of tax on depreciation

=44000(0.60) +106260(0.40)

= 68904

Year 2 = Savings in cost( net of tax )+ tax saving on depreciation

= 44000(0.60)+144900(0.40)

= 84360

Year 3 = Savings in cost ( net of tax ) +Tax saving on depreciation + Salvage value - Tax on capital gain+ Working capital

= 44000(0.60) + 48300(0.40) +126000-103460(0.40)+13000

= 26400+19320+126000-41384+13000

= 143336

= 213104

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