435 Words2 Pages

Managerial Finance FI515_W5_Project
11 – 7 You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department.
The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm.
The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000.
Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000.
The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor.
The firm’s marginal federal-plus-state tax rate is 40%.
Equipment Cost = $70,000 Additional Cost = $15,000 Salvage Cost (year 3) = $30,000 Increase in NWC = $4,000 Savings (per year) =$25,000 Tax –rate: = 40%
a. What is the net cost of the spectrometer? (That is, what is the Year-0 net cash flow?)
Equipment =-70,000
Additional Cost =-15,000
Inc in NWC =-4,000
Net Cost =-$89,000
b. What are the net operating cash flows in Years 1, 2, and 3?
Operating Cash Flows
Depreciation: Amount to be depreciated = 70,000 + 15,000 = $85,000 Year Depreciation % Depreciation/year
(MACR 3-year) (85,000 x %) 1 33.33% 28,331 2 44.45% 37,783
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3 14.81% 12,589
Total $78,703
Book Value @ end of 3 years: $6,297
Continued on next page.
Operating Cash Flow
Year 1 2 3
Savings 25,000 25,000 25,000
- Depreciation 28,331 37,783 12,589
Saving -Dep (3,331) (12,783) 12,411
Tax 1,332 5,113 (4,964)
After-tax Oper Inc (1,998) (7,670) 7,447
-------------------------------------------------
+ Depreciation 28,331 37,783 12,589
Net Cash Flows $26,333 $30,113 $20,036
c. What is the additional

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