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New-Project Analysis

The president of your company, MorChuck Enterprises, has asked you to evaluate the proposed acquisition of a new chromatograph for the firms R&D department. The equipments basic price is $70,000, and it would cost another $15,000 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 $30,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The machine would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firms marginal federal-plus-state tax rate is 25%.

1. What is the Year-0 cash flow?

   Answer

   $89,000.

2. What are the cash flows in Years 1, 2, and 3?

   Answer

   $25,832.63, $28,195.63, $21,897.13.

3. What is the additional (nonoperating) cash flow in Year 3?

   Answer

   $28,074.63.

4. If the projects cost of capital is 10%, should the chromatograph be purchased?

   Answer

   $4,669.11.