# Managerial Finance Week 5

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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&amp;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 ------------------------------------------------- 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