Question

REQUIRED INVESTMENT

Tannen Industries is considering an expansion. The necessary equipment would be purchased for $8 million, and the expansion would require an additional $3 million investment in net operating working capital. The tax rate is 40%.

What is the initial investment outlay? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000.

$ _______________

AFTER TAX SALVAGE VALUE

Karsted Air Services is now in the final year of a project. The equipment originally cost $22 million, of which 75% has been depreciated. Karsted can sell the used equipment today for $5.5 million, and its tax rate is 35%. What is the equipment's after-tax salvage value? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000.

$_________________

NEW PROJECT ANALYSIS

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $230,000, and it would cost another $34,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $103,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $69,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.

$ _______________

What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

In Year 1 $ ____________

In Year 2 $ ____________

In Year 3 $ ____________

Answer 1

Required investment for Tannen Industries:

$ 11,000,000

New project analysis for spectrometer:

After tax salvage value for Karsted Air services:

Book value of the equipment : 22 × 25% = $ 5.5 mn

Sale value : $ 5.5 mn

Hence no profit or loss on sale and thereby no tax consequences on sale

Hence after tax salvage value is $ 5,500,000