You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price...

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Finance

You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $110,000, and it wouldcost another $16,500 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 $33,000. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $7,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $36,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%. What is the initialinvestment outlay for the spectrometer, that is, what is the Year 0project cash flow? Round your answer to the nearest cent. Negativeamount should be indicated by a minus sign. $ What are theproject's annual cash flows in Years 1, 2, and 3? Round youranswers to the nearest cent. In Year 1 $ In Year 2 $ In Year 3 $ Ifthe WACC is 13%, should the spectrometer be purchased?

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3.9 Ratings (699 Votes)

Initial Investment Outlay Base Price Modification cost Increase in Working Capital 11000016500 7000 133500 since outflow bAnnual Cash Flows Year 1 2 3 Savings in Cost 36000 See Answer

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