The president of your company, MorChuck Enterprises, 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 $75,000, and it would cost another $16,000 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 $26,800. 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 $4,300. The machine would have no effect on revenues, but it is expected to save the firm $23,050 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-O net cash flow? b. What are the project recurring cash flows in Years 1, 2, and 37 $ $ Year 3: $ c. What is the additional (nonoperating) cash flow in Year 3? Year 1: Year 2: $ d. If the project's cost of capital is 12%, what is the NPV of the project? $ Should the chromatograph be purchased?
The president of your company, MorChuck Enterprises, 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 $75,000, and it would cost another $16,000 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 $26,800. 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 $4,300. The machine would have no effect on revenues, but it is expected to save the firm $23,050 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-O net cash flow? b. What are the project recurring cash flows in Years 1, 2, and 37 $ $ Year 3: $ c. What is the additional (nonoperating) cash flow in Year 3? Year 1: Year 2: $ d. If the project's cost of capital is 12%, what is the NPV of the project? $ Should the chromatograph be purchased?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:New-Project Analysis
The president of your company, MorChuck Enterprises, 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 $75,000, and it would cost another $16,000 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 $26,800. 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 $4,300. The machine would have no effect on revenues, but it is expected
to save the firm $23,050 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. Cash outflows and negative
NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.
a. What is the Year-0 net cash flow?
$
b. What are the project recurring cash flows in Years 1, 2, and 37
Year 1:
Year 2:
Year 3:
$
C. What is the additional (nonoperating) cash flow In Year 37
$
$
d. If the project's cost of capital is 12%, what is the NPV of the project?
$
Should the chromatograph be purchased?
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