f1515 week 5 project - $15,000 2. Depreciation $28,050...

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Project p. 460 11-7 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 $15,000 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 $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’s marginal federal-plus-state tax rate is 40%. a. What is the net cost of the spectrometer? Cost of investment at year 0 Baisc Price $(70,000) Modification $(15,000) Increase in NOWC $(4,000) Cash Outlay For New Equipment $(89,000) b. What are the net operating cash flows in Years 1, 2, and 3? Year 1 Year 2 Year 3 1. After-tax savings $15,000 $15,000
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Unformatted text preview: $15,000 2. Depreciation $28,050 $38,250 $12,750 3. Depreciation tax savings $11,220 $15,300 $5,100 Net cash flow $26,220 $30,300 $20,100 c. What is the additional (nonoperating) cash flow in Year 3? | | | | Year 3 | Beginning book value | | | $18,700 | Depreciation | | | $12,750 | Ending book value | | | $5,950 | | | | | | | | | | | Market value when salvaged at Year 3 | $30,000.00 | Book value when salvaged at Year 3 | | $5,950.00 | Expected gain or loss | | | $24,050.00 | Tax expense (credit) | | | $9,620.00 | | | | | | Cash from sale | | | $30,000.00 | Tax expense (credit) | | | $9,620.00 | Net cash flow from salvage | | $20,380.00 | Returned NOWC | | | $4,000.00 | | | | | $24,380.00 | | | | | | d. If the projects cost of capital is 10%, should the spectrometer be purchased? 0 1 2 3-$89,000 $26,220 $30,300 $44,480 23,836.36 25,041.32 33,418.48 NPV= -$6,703.84 or -$6,704.00 * Do not purchase....
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f1515 week 5 project - $15,000 2. Depreciation $28,050...

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