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Calculate all years' cash flow, NPV, IRR

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Capital Budgeting

You have been asked by the President of your company to evaluate the proposed acquisition of a new spectrometer for the firmâ??s R&D department. The equipmentâ??s base price is $75,000 and it would cost another $15,000 to install it. The spectrometer falls under 3-year MACRS schedule and will be sold after 3 years for $30,000. Use of the equipment will require an increase in net working capital of $4,000 in year 0. The net working capital will be fully recovered or returned when the project is terminated at the end of year 3. The project is expected to generated Earnings Before Taxes and Depreciation (EBTD) of $25,000 per year. Assume the firmâ??s tax rate is 40%.{Note 3-year MACRS tax rates are =.33; .45; .15 and .07 percent in years 1-4; you may recall that due to half-year convention 3-year rule leads to depreciation for 4 years)

(a) What is the cash flow in year 0?
(b) What is the cash flow in years 1, 2, 3?
© If the cost of financing this project is 10%, should the project be accepted using NPV or IRR?
(d) How does depreciation expense influence the results in part © even though depreciation is a non-cash expense?

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Solution Summary

Solution provides standard capital budgeting method to determine whether a proposed acquisition should be accepted. Half-year convention 3-year MACRS depreciation is also discussed.

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See Also This Related BrainMass Solution

Calculate Project Cash Flows, NPV and IRR

Revenues generated by a new fad product in each of the next 5 years are forecasted as follows:

Year Revenue
1 $40,000
2 30,000
3 20,000
4 10,000
Thereafter 0

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment.

A. What is the initial investment in the product? Remember working capital.

B. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40%, what are the project cash flows in each year?

C. If the opportunity cost of capital is 10%, what is the projected NPV

D What is the project IRR

Please see attached template 7-21

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