Question

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 $60,000, 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 $27,000. 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 $3,000. The machine would have no effect on revenues, but it is expected to save the firm $18,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 30%.

1. What is the Year-0 net cash flow? If the answer is negative, use minus sign.
   $   
2. 
   
3. 
   
4. 
   
5. 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	$

6. 
   
7. What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.
   $   
8. 
   
9. 
   
10. 
    
11. If the project's after-tax cost of capital is 11%, should the chromatograph be purchased?
    

Answer 1