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 $240,000, and it wouldcost another $48,000 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 $9,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $61,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.
a. 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.
b. What are the project's annual cash flows in Years 1, 2, and3? Round your answers to the nearest cent.
In Year 1 $
In Year 2 $
In Year 3 $
c. If the WACC is 13%, should the spectrometer be purchased?

Answer & Explanation Solved by verified expert

4.5 Ratings (823 Votes)

aInitial Investment Outlay Base Price Modification cost Increase in Working Capital 240000480009000 297000 bAnnual Cash Flows Year 1 2 3 Savings in Cost 61000 61000 See Answer

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You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $240,000, and it wouldcost another $48,000 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 $9,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $61,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.a. 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.b. What are the project's annual cash flows in Years 1, 2, and3? Round your answers to the nearest cent.In Year 1 $ ________In Year 2 $ ________In Year 3 $ ________c. If the WACC is 13%, should the spectrometer be purchased?