you must evaluate the purchase of a proposed spectrometer for the R&D department

Question

you must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $240,000, and it would cost another $36,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $108,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $66,000 per year in before-tax labor costs. The firm's marginal 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 to the nearest cent. Negative amount should be indicated by a minus sign.
$

b-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 $

c- If the WACC is 13%, should the spectrometer be purchased?
-Select-YesNoItem 5

Explanation / Answer

a) Initial Investment = -62964.36
b) In year 1 cash flkow = 76,032
In year 2 cash flow =  89,280
In year 3 cash flow = 120,960

c) Since NPV = -62964.36, since value is negative hence, spectrometer should not be purchased.
Hence No.

A B C D Year 0 1 2 3 1 Base Price -240,000 2 Modification Cost -36,000 3 Increase IN NWC -8,000 4 Labour Cost Savings 66,000 66,000 66,000 5 Depreciation MACRS Rate 33% 45% 15% 6 Depreciation =(Base Price + Modification Cost)* Depreciation Rate 91080 124200 41400 7 EBIT = Labour Cost Savings - Depreciation -25,080 -58,200 24,600 8 Tax = EBIT* Tax Rate -10032 -23280 9840 9 EAT= EBIT-Tax -15,048 -34,920 14,760 10 Depreciation 91080 124200 41400 11 After Tax Salvage Value 64800 12 Free Cash Flow -284,000 76,032 89,280 120,960 13 Discount Rate 13% NPV -62,964.36 NPV using excel formula = NPV(A13,B12:D12)+A12

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