The zero-year cash flow.

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Answer 1

Question

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

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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 $70,000, and it would cost another $15,000 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 $30,000. 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 $4,000. The machine 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 25%. a. What is the Year-0 cash flow? b. What are the cash flows in Years 1, 2, and 3? c. What is the additional (nonoperating) cash flow in Year 3?

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 $80,000, 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 $34,400. The MACRS rates for the first three years are 0.3333, 0.4445 and 0.1481. (Ignore the half-year convention for the straight-line method.) Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,000. The machine would have no effect on revenues, but it is expected to save the firm $30,200 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. What is…

You have been asked by the president of your company to evaluate the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s base price is $140,000, and it would cost another $30,000 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 an expected salvage value of $60,000. Use of the equipment would require an increase in spare parts inventory of $8,000. The spectrometer is expected to save the firm $80,000 per year in before-tax operating costs (i.e. effectively, there is an $80,000 cash inflow each year, excluding depreciation and tax effects). The firm’s marginal tax rate is 40%, and the cost of capital is 12%. Evaluate this decision using the NPV decision criteria. Should the firm buy the spectrometer? A) Yes, the project yields an NPV of $23,684.31B) Yes, the project yields an NPV of $25,390.45C) Yes, the project yields an NPV of $24,599.59D) No, the project yields an…

Answer 2

Question

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

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Answer 3

Question

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

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Answer 4

Question

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

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Answer 5

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

Answer 6

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

Answer 7

Chapter 11, Problem 7P

a)

Summary Introduction

To compute: The zero-year cash flow.

Answer 8

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

Answer 9

b)

Summary Introduction

To compute: The cash flows in year 1, 2 and 3.

Answer 10

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

Answer 11

c)

Summary Introduction

To compute: The third year’s additional operating cash flow.

Answer 12

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

Answer 13

d)

Summary Introduction

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

Answer 14

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Answer 15

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Answer 16

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Answer 17

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The zero-year cash flow.

Solution Summary: The author explains that the zero-year cash flow is 89,000, and the third year’s additional operating cash flows are 24,250. The company should not accept the chromatograph.

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To compute: The zero-year cash flow.

To compute: The cash flows in year 1, 2 and 3.

To compute: The third year’s additional operating cash flow.

To compute: To determine: whether the machine is to be purchased if cost of capital is 10%.

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