Question
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
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% |
N/A | N/A | N/A | N/A | N/A |
The microscope will require an inventory of spare parts worth $5,000. The equipment will not increase revenue, but will save the company $11,000 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 15%.
1. What is the initial (year-0) cash flow from assets from the project? Choose the right sign.
2. What is the cash flow from assets in year 1?
3. What is the cash flow from assets in year 2?
4. What is the after-tax salvage value at the end of year 3?
5. What is the cash flow from assets in year 3?
6. What is the NPV of this project?
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