NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The...

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NEW PROJECT ANALYSIS
You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $300,000, and it wouldcost another $60,000 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 $105,000. 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 $29,000 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 12%, should the spectrometer be purchased?
-Select-YesNoItem 5

Answer & Explanation Solved by verified expert

4.2 Ratings (588 Votes)

Req a:
Cash outflows in year-0
Equipment cost	-300000
Add: Modification cost	-60000
Total equipment cost		-360000
Working capitall investment		-5000
Cash outflows in Year-0		-365000

Cashflows
	Year-1	Year-2	Year-3
Savings in ccost	29000	29000	29000
Less: Tax @ 40%	11600	11600	11600
After tax savings	17400	17400	17400

Depreciation	118800	162000	54000
Tax shield @ 40%	47520	64800	21600
Annual cashflows	64920	82200	39000

After Tax salvage:
Sales value	105000
Book value (360000*7%)	25200
Gain on sales	79800
Tax on Gain @ 40%	31920
After Tax salvage = 105000-31920 = 73080

NPV:
	Year-0	Year-1	Year-2	Year-3
Cashflows	-365000	64920	82200	39000
After tax salvage				73080
Net cashflows	-365000	64920	82200	112080
PVF at 12%	1	0.892857	0.797194	0.71178
Present value of CF	-365000	57964.29	65529.34	79776.33
NPV	-161730

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NEW PROJECT ANALYSISYou must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $300,000, and it wouldcost another $60,000 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 $105,000. 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 $29,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.What is the initial investment outlay for the spectrometer,that is, what is the Year 0 project cash flow? Round your answer tothe nearest cent. Negative amount should be indicated by a minussign.$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 12%, should the spectrometer be purchased?-Select-YesNoItem 5