FI515_W5_Project_VanessaRay

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

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

View Full Document Right Arrow Icon
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 
Background image of page 1

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

View Full DocumentRight Arrow Icon
Background image of page 2
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 projects 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

This note was uploaded on 03/01/2012 for the course ACCOUTNING 550 taught by Professor Abner during the Spring '11 term at DeVry Houston.

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 Right Arrow Icon
Ask a homework question - tutors are online