Problem 137 NewProject Analysis The president of the company

Problem 13-7 New-Project Analysis 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 $190,000, and it would cost another $28,500 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 $66,500. 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 $7,600. The machine would have no effect on revenues, but it is expected to save the firm $76,000 per year in before-tax operating costs, mainly labor. The firm\'s marginal federal-plus-state tax rate is 30%. a. What is the Year-0 net cash flow? If the answer is negative, use minus sign. b. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar Year 1 Year 2 Year 3 c. What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar d. If the project\'s after-tax cost of capital is 13%, should the chromatograph be purchased? Select

Solution

a). Calculate of year 0 net cash flow :-

b). Net Operating Cash Flows :-

Depreciation :-

c). Additional Cash Flow :-

d). Net Present Value :-

Particulars	Amount ($)
Cost	190000
Modification Cost	28500
Change in Net working capital	7600
Total Net Cost	226100