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 $70,000, and it would cost another $17,500 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 $28,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $23,000 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. Negative amount should be indicated by a minus sign. $ 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 12%, should the spectrometer be purchased?

Explanation / Answer

The cash flow tble along with NPV is as follows:

The project should not be purchased

Year 0 1 2 3 Initial Investment -70000 Modification cost -17500 Working Capital -15000 Savings 23000 23000 23000 Depreciation % 33% 45% 15% Dep. Amount -23100 -31500 -10500 Profit before taxes -100 -8500 12500 Taxes or tax savings 40 3400 -5000 Profit after taxes -60 -5100 7500 Add back Depr. 23100 31500 10500 Add back WC 15000 After tax salavage value 18760 Cashflow -102,500 23,040 26,400 51,760 NPV $ -24,040.91

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.