You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $140,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $57,000. The equipment would require a $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 $23,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.
$
What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
Year 1: $
Year 2: $
Year 3: $
If the WACC is 10%, should the spectrometer be purchased?

Solutions

Expert Solution

Solution:-

To Calculate Year 0 Project Cash Flows-

Year 0 Cash Flow = -Initial Investment - Net Working Capital

Year 0 Cash Flow = -$140,000 - $13,000

Year 0 Cash Flow = -$153,000

To Calculate Annual Cash Flows for Year 1,2,3-

Cash Flow are calculate in Below Diagram.

Year 1 = $28,916.67

Year 2 = $28,916.67

Year 3 = $84,666.67

To Calculate NPV of the Project-

NPV of the Project is -$39,203.

NPV of the Project is accepted when it is greater than or equal to zero. Hence, in the Given Case, NPV is Negative. So, Spectrometer cannot be purchased.

If you have any query related to question then feel free to ask me in a comment.Thanks.

jeff jeffy answered 1 year ago

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