You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $70,000, and it would cost another $10,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $31,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $78,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2 $ In Year 3 $

F0 - 81,000

Cash flow per year:

Year 1:  57.492‬

Year 2: 61,380‬

Year 3: 67,158‬

Explanation:

Equipment price 70,500 + 10,500 = 81,000

Year 1:

depreciation tax shield:

depreication x (1+t) =

(81,000 x 0.33)  x  0.4  = 10.692

78,000 labor cost savings after-tax = 46,800

Total cash savings: 46.800 + 10.692 = 57.492‬

Year 2:

depreciation tax shield:

depreication x t =

(81,000 x 0.45)  x 0.40 = 14,580

78,000 labor cost savings after-tax = 46,800

Total cash savings: 46.800 + 14,580 = 61,380‬

Year 3:

depreciation tax shield:

depreication x (1+t) =

(81,000 x .15)  x   0.40 = 4,860

78,000 labor cost savings after-tax = 46,800

sale of asset:

gain: sales price at disposal less book value

31,500 - (81,000 x (0.15 + 0.45 + 0.33) =

31,500 - 5.670‬ = 25.830‬ gain before taxes

25,830 x (1 - 0.6) = 15.498‬ after tax

Total cash savings: 46.800 + 4,860 + 15,498 = 67.158‬

Notice the working capital are spare parts inventory thus, it do not involve cash flow.

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