{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

FI515_W5_Project_VanessaRay

# FI515_W5_Project_VanessaRay - per year of \$25,000 times 1...

This preview shows pages 1–2. Sign up to view the full content.

Problem 11-7 Question A The net cost of the spectrometer, or the Year 0 net cash flow, is \$89,000. The calculation to find the aforementioned amount is as follows: Equipment’s Basic Price (\$70,000) Add: Cost to Modify Equipment for Special Use (\$15,000) Add: Increase in Net Working Capital (\$4,000) Net Cost of the Spectrometer (\$89,000) Question B The net operating cash flows in Years 1, 2, and 3 are found by adding the amount of after tax savings and the  depreciation shield for a 3 year MACRS fixed asset. The calculation to find the net operating cash flows for the aforementioned years is as follows: Year 1 Year 2 Year 3 After Tax Savings \$15,000 \$15,000 \$15,000 Depreciation Shield \$11,220 \$15,300 \$5,100 Net Cash Flow \$26,220 \$30,300 \$20,100 The Depreciation Shield is calculated by multiplying the depreciable basis of \$85,000 times the MACRS rates  for a 3-year fixed asset found in Appendix 11-A. The after tax savings of \$15,000 is derived from the revenues

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: per year of \$25,000 times 1 minus the tax rate of 40%. Question C The additional (non-operating) cash flow in Year 3 is \$24,380. The calculation to find the additional (non-operating) cash flow in Year 3 is as follows: Year 3 Salvage Value \$30,000 Tax on Salvage Value (\$9,620) Return on Net Working Capital \$24,380 Tax on Salvage Value is found by taking the amount of the salvage value less the book value times the tax rate. Question D If the project’s cost of capital is 10%, the spectrometer should not be purchased since the project has a negative net present value. The calculation proving the negative net present value of the project is as follows: Year 1 Net Cash Flow Present Value @ 10% (\$89,000) (\$89,000) 1 \$26,220 \$22,836 2 \$30,300 \$25,041 3 \$44,480 \$33,418 The Net Present Value is the sum of all future cash flows less the initial investment or (\$6,705)...
View Full Document

{[ snackBarMessage ]}

### Page1 / 2

FI515_W5_Project_VanessaRay - per year of \$25,000 times 1...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online