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 $10,500 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 $36,000 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, thatis, what is the Year 0 project cash flow? Round your answer to thenearest cent. Negative amount should be indicated by a minussign.
What are the project's annual cash flows in Years 1, 2, and3?

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4.0 Ratings (484 Votes)

AInitial Investment Capital cost of equipment 7000010500 80500 Investment in net operating working capital 7000 Investment at year 0 cash flow at year0 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 $10,500 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 $36,000 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, thatis, what is the Year 0 project cash flow? Round your answer to thenearest cent. Negative amount should be indicated by a minussign.What are the project's annual cash flows in Years 1, 2, and3?