Answer:
See the explanation for the answers.
Explanation:
(a)
Year
0 1 2 3
Cost of Equipment= 237500 0 0 0
Base price +
Modification
Cost
Working Capital 13000 0 0 -1300
Saving in 0 57000 57000 57000
Labor Cost
Depreciation(%) 0 33% 45% 15%
Depreciation 0 78375 106875 35625
.Book Value 237500 159125 52250 16625
.Salvage Value 0 0 0 57000
.After Tax 0 0 0 40850
Salvage Value
.Cash Flow -250500 65550 76950 102300
.Discounted Cash -250500 57500 59210.5 69049.59
Flow at 14%
NET VALUE -64739.89
(a)
Initial Investment / Cash Flow in year 0 = Cost of Equipment + Increase in working capital
= 237500 + 13000
=$250,500
Cash Flows in Years 1 and 2 = (Saving in Labor Cost - Depreciation) * (1 - Tax Rate) + Depreciation
Cash Flow in year 3 = (Saving in Labor Cost - Depreciation) * (1 - Tax Rate) + Depreciation + Recovery of Working Capital + After Tax Salvage Value
After Tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * Tax Rate
= 57000 - (57000 - 16625) * 0.4
= $40,850
(b)
Year Cash Flow
1 $65550
2 $76950
3 $102300
(c)
If WACC is 14%, the net present value of the project is -$64,739.89. Since NPV is negative, the barometer should not be purchased.
