You have been asked by the president of your company to evaluate the proposed acquisition of...

You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department. The equipment’s basic price is $70,000 and it would cost another $15,000 to modify it for special use by your firm. The spectrometer, which has a MACRS 3-year recovery period, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 40 percent. If the project’s cost of capital is 10 percent, should the firm purchase the spectrometer? Answer based on (i) the NPV, (ii) the IRR, (iii) the profitability index, and (iv) the payback rule (your firm accepts projects with a payback of 3 years or less).

Expert Solution

We can calculate the desired result in excel sheet as follows:

Formulas used in the Excel Sheet are:

So, the results are:

NPV = $ -6,700.18

IRR = 6.03%

PI = - 7.88%

Payback Period = 2.73 years

jeff jeffy answered 2 years ago

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You have been asked by the president of your company to evaluate the proposed acquisition of...

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