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 $240,000, and it wouldcost another $36,000 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 $72,000. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $15,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $66,000 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-Yes or No

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3.6 Ratings (517 Votes)

Initial Investment Base Price Modification Cost Initial Investment 240000 36000 Initial Investment 276000 Useful Life 3 years Depreciation Year 1 33 276000 Depreciation Year 1 91080 Depreciation Year 2 45 276000 Depreciation Year 2 124200 Depreciation Year 3 15 276000 Depreciation Year 3 41400 Book See Answer

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NEW PROJECT ANALYSISYou must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $240,000, and it wouldcost another $36,000 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 $72,000. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $15,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $66,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.What is the initial investment outlay for the spectrometer,that is, what is the Year 0 project cash flow? Round your answer tothe nearest cent. Negative amount should be indicated by a minussign.$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-Yes or No