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

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You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $70,000, and it wouldcost another $17,500 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 $17,500. 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 $78,000 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?

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4.1 Ratings (561 Votes)

a Initial Investment Outlay Base Price 70000 Modify equipment 17500 Increase in net operating capital 7000 Initial Investment Outlay 94500 b Annual Cash Flow Total investment in equipment 87500 7000017500 Depreciation tax shield n Year 1 2 3 A See Answer

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You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $70,000, and it wouldcost another $17,500 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 $17,500. 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 $78,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.What is the initial investment outlay for the spectrometer,that is, what is the Year 0 project cash flow? Round your answer tothe nearest cent. Negative amount should be indicated by a minussign.$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?