10 Part 3 What is the incremental cash flow in year 2? B Attempt 1/5 for 10 pts. Intro You're evaluating a new electron microscope for the QA (quality assurance) unit. The microscope will cost $23,000 to buy and another $2,000 to install, and will be sold for $1,800 after 3 years. It falls into the 3-year MACRS class, with depreciation rates as follows: Year 1 2 3 4 Depreciation rate 33% 45% 15% 7% The microscope will require an inventory of spare parts worth $5,000. The equipment will not increase revenue, but will save the company $10,000 in labor costs each year. Your company's marginal tax rate (federal plus state) is 34% and the appropriate cost of capital for this project is 8%. 10425 Correct In year 2, net equipment cost and change in net working capital are still zero. Depreciation: D = BV *dz = 25,000* 0.45 = 11,250 EBIT = Cost savings - Depreciation = 10,000-11,250 =-1,250 CF2 = SOCF-Equip. cost - Change in NWC =EBIT (1-1)+ Dep. - Equip. cost-Change in NWC =-1,250 (1-0.34)+11,250-0-0 = 10,425 Part 1 B Attempt 2/5 for 9.8 pts. What is the initial (year-0) incremental cash flow from the project? Choose the right sign -30000 Correct At the beginning of the project, EBIT and depreciation are both zero. Initial net equipment cost is the cost of purchase and installation: Equip. cost = 23,000 + 2,000 = 25,000 This is the amount that can be depreciated over time: BV = 25,000 The required spare parts create a change in net working capital: Change in NWC 5,000 CF SOCF - Equip. cost - Change in NWC = EBIT (1-1)+ Dep. - Equip. cost - Change in NWC =0+0-25,000-5,000 = -30,000 Part 4 What is the net salvage value at the end of year 3? 1783 Depreciation: D = BV*d = 25,000* 0.15 = 3,750 Correct Book value in year 3: BV = Initial book value-Accumulated depreciation =BVo-(D + D+ D) =25,000-(8,250 + 11,250 +3,750) = 1,750 Net salvage value: NSV SV-t(SV-BV) =1,800 -0.34 (1,800 -1,750) = 1,783 Part 2 BAttempt 1/5 for 10 pts. What is the incremental cash flow in year 1? 9405 Correct In year 1, net equipment cost and change in net working capital are zero. Depreciation: D = BV0* d Part 5 What is the incremental cash flow in year 3? 0+ decimals Submit = 25,000* 0.33 = 8,250 BAttempt 1/5 for 10 pts. 8* Attempt 3/5 for 9.6 pts. EBIT = Cost savings - Depreciation = 10,000 - 8,250 = 1,750 CF = SOCF-Equip. cost - Change in NWC = EBIT (1-1) + Dep. - Equip. cost - Change in NWC 1,750 (1-0.34) +8,250-0-0 = 9,405 Part 6 What is the NPV of this project? 8 Attempt 3/5 for 9.6 pts. Submit