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 $300,000, and it wouldcost another $60,000 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 $90,000. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $13,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $40,000 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 10%, should the spectrometer be purchased?
-Select-YesNoItem 5

Answer & Explanation Solved by verified expert

3.8 Ratings (485 Votes)

aInitial Investment Outlay Base Price Modification cost Increase in Working Capital 3000006000013000 373000 bAnnual Cash Flows Year 1 2 3 Savings in Cost 40000 40000 40000 See Answer

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You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $300,000, and it wouldcost another $60,000 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 $90,000. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $13,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $40,000 per year in before-tax labor costs. The firm'smarginal federal-plus-state tax rate is 40%.What is the initial investment outlay for the spectrometer,that is, what is the Year 0 project cash flow? Round your answer tothe nearest cent. Negative amount should be indicated by a minussign.$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 10%, should the spectrometer be purchased?-Select-YesNoItem 5