Click here to read the eBook: Analysis of an Expansion Project NEW PROJECT ANALYSIS You must evaluate the...

90.2K

Verified Solution

Question

Finance

Click here to read the eBook: Analysis of an ExpansionProject
NEW PROJECT ANALYSIS
You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $290,000, and it wouldcost another $72,500 to modify the equipment for special use by thefirm. The equipment falls into the MACRS 3-year class and would besold after 3 years for $72,500. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $5,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $53,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.
What is the initial investment outlay for the spectrometer,that is, what is the Year 0 project cash flow? Round your answer tothe nearest cent. Negative amount should be indicated by a minussign.
$[ ]
What are the project's annual cash flows in Years 1, 2, and 3?Round your answers to the nearest cent.
In Year 1 $[ ]
In Year 2 $[ ]
In Year 3 $[ ]
If the WACC is 14%, should the spectrometer be purchased?yes orno

Answer & Explanation Solved by verified expert

3.8 Ratings (503 Votes)

THIRD YEAR CASH FLOW IS See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Click here to read the eBook: Analysis of an ExpansionProjectNEW PROJECT ANALYSISYou must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $290,000, and it wouldcost another $72,500 to modify the equipment for special use by thefirm. The equipment falls into the MACRS 3-year class and would besold after 3 years for $72,500. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $5,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $53,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.What is the initial investment outlay for the spectrometer,that is, what is the Year 0 project cash flow? Round your answer tothe nearest cent. Negative amount should be indicated by a minussign.$[ ]What are the project's annual cash flows in Years 1, 2, and 3?Round your answers to the nearest cent.In Year 1 $[ ]In Year 2 $[ ]In Year 3 $[ ]If the WACC is 14%, should the spectrometer be purchased?yes orno