New project analysis PLEASE ROUND CORRECTLY AND FOLLOW DIRECTIONS You must evalu
ID: 2762771 • Letter: N
Question
New project analysis PLEASE ROUND CORRECTLY AND FOLLOW DIRECTIONS
You must evaluate a proposed spectrometer for the R&D department. The base price is $90,000, and it would cost another $18,000 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 $36,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $25,000 per year in before-tax labor costs. The firm's marginal 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 to the nearest cent.
$
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?
YES OR NO?
Explanation / Answer
Solution :
Year 0 project cash flow = -90000-11000
-101000
1
2
3
after tax savings in labor cost
15000
15000
15000
Tax sheild on depreciation (Depreciation rate*90000*40%)
11880
16200
5400
after tax salvage 36000- (90000*93%)
29700
net working capital recovery
11000
project's annual cash flows
26880
31200
61100
0
1
2
3
after tax savings in labor cost
-101000
15000
15000
15000
Tax sheild on depreciation
11880
16200
5400
after tax salvage 36000- (90000*93%)
29700
net working capital recovery
11000
-101000
26880
31200
61100
Discount factor @10%
1
0.909090909
0.826446281
0.751314801
Present value
-101000
24436.36364
25785.12397
45905.33434
NPV
- 4,873.18
If the WACC is 10%, should the spectrometer be purchased? No because NPV is negative.
Year 0 project cash flow = -90000-11000
-101000
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