FIN515
Week 5 Project

Equipment’s Basic Cost 70,000
To Modify it to Firm 15,000
The Spectrometer (MARC 3 year Class
Would be sold after 3yrs 30,000
Equipment’s requires increase in net working capital 4,000
The Spectrometer no effect on Revenue
But expected to save 25,000 per year before-tax operating cost
Federal plus state tax rate 40%

A. What is the net cost of the spectrometer-
Price – 70,000+ 15,000 + 4,000
Net Cost – (89,000)

B. What are the net operating cash flow in Year 1,2, and 3

Depreciation Expense = Cost multiplied by MACRs Allowance MACRs 33% yr 1 – 45% yr 2 – 15% yr 3 Year 1 Year 2 Year 3 85,000 x.33 85,000 x .45 85,000 x .15
Depreciation Expense 28,050 38,250 12,750
(Dep. Exp x Tax rate)
Depreciation after Tax 11,220 15,300 5,100
After- Tax Saving – 25,000 x (1-.40)= 15,000 per year
After Tax 15,000 15,000 15,000
Net Operating Cash Flow 26,220 30,300 20,100

C. What are the additional (non-operating ) cash flow in year 3

Net Salvage Value =Salvage Value - Tax Rate + Increase in working Capital
Book Value = Dep. cost x Acc. Dep. Rate
Book Value = 85,000 x 7%
Book Value = 5,950

Salvage Value = 30,000
Book Value = 5950
Total 24,050
Tax Rate 40%
Tax on SV 9,620

Salvage Value - 30,000
Tax on SV 9620
SV after – Tax 20,380
Increase in WC 4,000 24,380- additional (non-operating) Cash Flow in yr 3

D. If the project’s Cost of Capital is 10%, should the spectrometer be purchased?

-89000
26220
30300
44480 add in additional (non-operating )CF in yr 3
0
$82,296.17
-89,000
($6,703.83) NVP
$0.92 Profitability Index (PI)
6% IRR
8% MIRR

It is not recommended that the spectrometer be