What is the initial net investment for the machine


Question: You have been asked by the president of your company to evaluate the proposed acquisition of a new hydropropolaser for the R&D department.   The price for this equipment is $70,000, and it would cost another $14,000 to modify it for special use by your firm.  The hydropropolaser, which has a MACRS 3-year recovery period (wts.  33%, 45%, 15%, 7%) would be sold after 3 years for $30,000.  Use of this equipment would require an increase in net working capital of $11,000.  The hydropropolaser would have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor.  The firm’s marginal tax rate is 36%.                                   
                                   
1. What is the initial net investment for the machine (CF0)?   

Price of machine $70,000.00
modification $14,000.00
increase in net working capital $11,000.00
Initial Net Investment for machine $95,000.00

2. What are the net operating cash flows from this project for years 1 –3?    

First have to depreciate

YR Depre Basis Weight Formula Tax Savings Relevant Cash Flows
CF0 84,000



CF1 84,000 33 .33*(84000)*(.36) $9,979.20 ?
CF2 84,000 45 .45*(84000)*(.36) $13,608.00 ?
CF3 84,000 15 .15*(84000)*(.36) $4,536.00 ?
CF4 84,000 7 .07*(84000)*(.36) $2,116.80 ?

Relevant CasH Flows-tax benefits + depreciation savings   


Relevant Cash Flows Tax Savings
Depreciation Savings
1
$9,979.20 .33*(84000) $27,720.00
2 ? $13,608.00 .45*(84000) $37,800.00
3 ? $4,536.00 .15*(84000) $12,600.00
4 ? $2,116.80 .07*(84000) $5,880.00

?


3. What are the additional cash flows from this project in year 3?

4. If the firm’s WACC is 14%, should they purchase the hydrpropolaser?

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Finance Basics: What is the initial net investment for the machine
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