Question

Excel Online Structured Activity: New project analysis

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $60,000, and it would cost another $12,000 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 $30,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $30,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. 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.

   $  

2. 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 $  

3. If the WACC is 14%, should the spectrometer be purchased?

   _____YesNo

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Answer 1

Time line		0	1	2	3
Cost of new machine		-72000
Initial working capital		-13000
=Initial Investment outlay		-85000
3 years MACR rate			33.00%	45.00%	15.00%	7.00%
Savings			30000	30000	30000
-Depreciation	=Cost of machine*MACR%		-23760	-32400	-10800	5040	=Salvage Value
=Pretax cash flows			6240	-2400	19200
-taxes	=(Pretax cash flows)*(1-tax)		3744	-1440	11520
+Depreciation			23760	32400	10800
=after tax operating cash flow			27504	30960	22320
reversal of working capital					13000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				18000
+Tax shield on salvage book value	=Salvage value * tax rate				2016
=Terminal year after tax cash flows					33016
Total Cash flow for the period		-85000	27504	30960	55336
Discount factor=	(1+discount rate)^corresponding period	1	1.14	1.2996	1.481544
Discounted CF=	Cashflow/discount factor	-85000	24126.31579	23822.715	37350.224
NPV=	Sum of discounted CF=	299.25

Accept project as NPV is positive