Fi515

In: Business and Management

Submitted By shehztatic
Words 411
Pages 2
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 $10,750 to modify it for special use by your firm. The spectrometer, which falls into the MARCS 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%.
a. What is the net cost of the spectrometer (i.e., the Year-0 Net Cash Flow)
Price ($70,000)
Modification (15,000)
Change in NWC (4,000)
Net Cost ($89,000)

b. What are the net operating cash flows in Years 1, 2 and 3? Year 1 Year 2 Year 3 *After-tax savings $15,000 $15,000 $15,000 **Depreciation shield 11,220 15,300 5,100 Operating cash flow $26,220 $30,300 $20,100 The after-tax cost savings is $25,000(1 – T) = $25,000(0.6) = = $15,000.
The depreciation expense in each year is the depreciable basis, $85,000, times the MACRS allowance percentage of 0.33, 0.45, and 0.15 for Years 1, 2 and 3, respectively. Depreciation expense in Years 1, 2, and 3 is $28,050, $38,250, and $12,750. The depreciation shield is calculated as the tax rate (40%) times the depreciation expense in each year.
c. What is the additional (non-operating) cash flow in Year 3?
Salvage value $30,000
Tax on SV*…...

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