The president of the company you work for has asked you to evaluate the proposed
ID: 2794039 • Letter: T
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 $100,000, and it would cost another $15,000 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 $25,000. 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 $5,000. The machine would have no effect on revenues, but it is expected to save the firm $30,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 30%.
What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.
$
Explanation / Answer
Total Initial Investment = $100,000 + $15,000 + 5,000
= $120,000
Total Initial Investment is $120,000.
Book Value of assets at end of year 3 = (1 - 33.33% - 44.45% - 14.81%) × ($100,000 + $15,000)
= $115,000 × 7.41%
= $8,521.50.
Book value of equipment at end of year 3 will be $8,521.50.
Sale price = $25,000
After tax sale price = $8,521.50 + ($25,000 - $8,521.50) × (1 - 30%)
= $8,521.50 + (16,478.50 × 70%)
= $20,056.45.
After tax sale price is $20,056.45.
Total non operating cash flow = Net proceed from sale of assets + Return of working capital
= $20,056.45 + $5,000
= $25,056.45.
Total non operatring cash flow in year 3 is $25,056.45.
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