11-7) New-Project Analysis
You obtain been asked by the professorship of your company to evaluate the proposed acquisition of a new mass spectrometer for the rigids R&D department. The equipments basic price is $70,000, and it would cost another $15,000 to modify it for excess use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold aft(prenominal) 3 years for $30,000. Use of the equipment would require an increase in moolah working capital (sp ar parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to publish the firm $25,000 per year in before-tax operating costs, mainly labor. The firms marginal federal-plus-state tax rate is 40%.
a. What is the net cost of the spectrometer? (That is, what is the course of instruction-0 net immediate payment flow?)
b. What are the net operating cash flows in years 1, 2, and 3?
c. What is the additional (nonoperating) cash flow in Year 3?
d. If the projects cost of capital is 10%, should the spectrometer be purchased?
Answers-
A) Net greet after Year 0
Equipment| ($70,000)|
Modifications| ($15,000)|
extra Net Capital Needed| ($4,000)|
Total Net be (Year-0)| ($89,000)|
B) Operating Cash flow for Year 1-3
| Year 1| Year 2| Year 3|
After tax-cost savings| $15,000 | $15,000 | $15,000 |
Depreciation| $28,050 | $38,250 | $12,750 |
Depreciation tax savings| $11,220.0 | $15,300.0 | $5,100.0 |
| | | |
Operating cash flow| $26,220 | $30,300.0 | $20,100.0 |
C) Additional (nonoperating) cash flow in Year 3
Salvage Value| $30,000 |
Tax on Salvage order | $9,620 |
Net Working Capital recovery| $4,000 |
| |
Cash run for| $24,380 |
D) If the projects cost of capital is 10%, should the spectrometer be purchased?
| Year 0| Year 1 | Year 2| Year 3|
Cash Flow| -89,000| 26,220| 30,300| 44,480|
Cost of Capital| 10%| | | |
| | | | |
NPV| ($6,703.83)| | | |...If you want to get a abundant essay, order it on our website: Orderessay
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