The base price of a spectrometer is $140,000, and shipping and installation costs would add another $30,000. the machine falls into the macrs 3-year class (33%, 45%, 15% and 7%) and it would be sold after 3 years for $60,000.

the machine would require a $8,000 increase in working capital (increased inventory less increased accounts payable).
there would be no effect on revenues, but pre-tax labor costs would decline by $50,000 per year.
the marginal tax rate is 40%, and the wacc is 12%.

1. what is the initial investment outlay, that is, the year 0 project cash flow?
2. what are the net operating cash flows during years 1, 2, and 3?
3. should the machine be purchased? explain your answer.

Answer and Explanation:

A.) The net cost of the spectrometer is 170,000 ( 140,000 plus 30,000)

The Year 0 project cash flow is 178,000. ( 170,000 plus spare parts inventory of 8000)

B.) Project Net cash flow Year 1 is: $45587

Cost saving before tax 50000

Less Depreciation 36300 ( 170,000 minus salvage value 60,000) x .33 =36,300)

Less Amortization Spare Parts 2667 ( 8000 divided by 3 =2667)

Net Income after depreciation/amortization 11033

Income Tax 40% 4413

Net Income after Tax 6620

Add: non cash charges depreciation/amortization 38967

Cash flow generated year 1 45587

Project Net cash flow Year 2 is: $ 50867

Cost saving before tax 50000

Less Depreciation 49500 ( 170,000 minus salvage value 60,000) x .45 = 49500 )

Less Amortization Spare Parts 2667 ( 8000 divided by 3 =2667)

Net Income/loss after depreciation/amortization -2167

Income Tax shield on loss 40% 867

Net Income/loss after Tax shield -1300

Add: non cash charges depreciation/amortization 52167

Cash flow generated year 2 50867

Project Net cash flow Year 3 is: $ 76747

Cost saving before tax 50000

Less Depreciation 16500 ( 170,000 minus salvage value 60,000) x .15 =16500)

Less Amortization Spare Parts 2667 ( 8000 divided by 3 =2667)

Net Income after depreciation/amortization 30833

Gain onSale of equipment at year 3 52300 ( $ 60000 minus book value of equipment7700)

Total Income 83133

Income Tax 40% 33253

Net Income after Tax 49880

Add: non cash charges depreciation/amortization 19167

Total income after tax 69l047

add: Sale of equipment book value 7700

Cash flow Generated Year 3 76747

C.) Based on Net Present value of the cash flow discounted at 12%, the spectrometer should not be purchased as the NPV is negative at $-42120

cash flow year 0 -178000 x 1.0 Present value factor of $1 at 12% at year 0= -178000

Cash flow year 1 45587 x 0.892857143 =40702

Cash Flow year 2 50867 x0.797193878= 40551

Cash Flow year 3 76747 x 0.711780248= 54627

Net Present value $ -42120

Present value factor at 12% at end of year 1 = 1/1.12=0.892857143

Present value factor of 12% at end of year 2 =0.892857143/1.12=0.797193878

Present value factor of 12% at end of year 3 =0.797193878/1.12=0.711780248

d. all of the above are true.

if you use only 25 for your entertainment and only 200 for the groceries that you really need and take out the 50 per month for the computer then that should be enough