Answer:
Part A)
Year 0 net cash flow would comprise of basic price, modification cost and requirement for net working capital. The formula for cash flow in Year 0 would be:
Year 0 Net Cash Flow = -Basic Price - Modification Cost - NWC
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Using the values provided in the question, we get,
Year 0 Net Cash Flow = -190,000 - 47,500 - 9,500 = -$247,000
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Part B:
Year 1, 2 and 3 would required adjustment for depreciation charges (under MACRS) against expected savings. The depreciation rates for 3 year class asset would be 33%, 45% and 15% for Year 1, Year 2 and Year 3 respectively.
Depreciation would be calculated on the equipment's basic price and modification cost.
The formula that can be used to calculate the net operating cash flow would be:
Net Operating Cash Flow = (Sales - Depreciation)*(1-Tax Rate) + Depreciation
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Using the values provided in the question, we get, the table in the attached file
Important Information:
Depreciation (Year 1) = (190,000 + 47,500)*33% = $78,375
Depreciation (Year 2) = (190,000 + 47,500)*45% = $106,875
Depreciation (Year 3) = (190,000 + 47,500)*15% = $35,625
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Part C:
Additional non operating cash flow would consist of after-tax salvage value and return of net working capital. Relevant formulas are:
Additional Non Operating Cash Flow = After Tax Salvage Value + Return of Net Working Capital
After Tax Salvage Value = Sales Value +/- Tax on Loss/Gain from Sale of Asset
Loss/Gain from Sale of Asset = Sales Value - Book Value
Book Value = (Basic Price + Modification Cost)*(1-(33%+45%+15%))
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Using the above mentioned formulas, we get,
Book Value = (190000 + 47500)*(1-(33%+45%+15%)) = $16,625
Gain on Sale of Equipment = 66,500 - 16,625 = $49,875
Tax on Gain = $49,875*30% = $14,962.50
After Tax Salvage Value = 66,500 - 14,962.50 = $51,537.50
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Additional (Non Operating) Cash Flow = $51,537.50 + $9,500 = $61,037.50 or $61,038
Explanation:
