New-Project Analysis The president

| May 22, 2015

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 $150,000, and it would cost another $22,500 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 $67,500. Use of the equipment would require an increase in net working capital (spare parts inventory) of $6,000. The machine would

have no effect on revenues, but it is expected to save the firm $45,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 30%. a. What is the Year-0 net cash flow? If the answer is negative, use minus

sign. $ b.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 $ c.What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar. $ d.If the project’s

cost of capital is 10%, should the chromatograph be purchased?

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Financial Ratio
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Category: Finance

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