In: Finance
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%.
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.
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