The base price is $240,000 it would cost another $36,000 to modify the equipment

Question

The base price is $240,000
it would cost another $36,000 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 $120,000.
The applicable depreciation rates are 33%, 45%, 15%, and 7%.

The equipment would require an $8,000 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.

he firm's marginal federal-plus-state tax rate is 40%.

The initial investment outlay for the spectrometer, is $284,000

What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

1. in Year 1 $_____________ THE ANSWER IS NOT 44000

2. in Year 2 $_____________ THE ANSWER IS NOT 44000

3. in Year 3 $_____________ THE ANSWER IS NOT 150580.4

Explanation / Answer

Year 0 project cash flow = = 240000+36000+8000 = $ 284000 Cash flow = Savings in labour costs - Depreciation - tax - Sold in the last year - tax so, for Year 1,savings before tax = 44000-91080 = -47080 and Savings after tax and depreciation = 44000 so Year 1 cash flow = $44000 for Year 2, savings before tax = 44000-83214 = -39214 and Savings after tax and depreciation = 44000 so Year 2 cash flow = $44000 and for Year 3, savings before tax = 44000-15255 = 28745 and Savings after tax and depreciation = 44000, sales in last year = 120000 and tax cut on that = 13419.6 so Year 3 cash flow = $150580.4

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