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You have een 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 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 equimpment 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 $25,000 per year in beforetax operating cost, mainly labor. The firm's marginal federalplus state tax rate is 40%.
a. What is the net cost of the spectrometer? (That is, what is the Year0 net cash flow?)
b. What are the net opeating cash flows in Years 1, 2, and 3?
c. What is additional (nonoperating) cash flow in Year 3?
d. If the project's cost of capital is 10%, should the spectrometer be purchased?
This is what I did so far for A, but got stuck:
A.
The net cost is $85,000 (70,000 plus $15,000)
The year 0 project cash flow is $89,000 (85,000 plus spare parts inventory of 4,000)
B. Project net cash flow year 1 is :
Cost saving before tax 25,000
Less Depreciation 55,000(85,000 minus salvage value 30,000)
Less amoritization spare parts 1,333 (4,000 divided by 3yrs = 1,333)
Please help since I'm stuck with the rest of part B to get the cash flow and if someone could break down the steps for the Net income after depreciation/amoritization, the income tax of 40%, then add the non cash charges, then I think I will get the cash flow for year 1 and I could probably figure out year 2 and 3 once I know how to get year 1 cash flow.
Thanks in advance
