Question

you must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $240,000, and it would cost another $36,000 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 $108,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $66,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

a-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.
$

b-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 $

c- If the WACC is 13%, should the spectrometer be purchased?
-Select-YesNoItem 5

Answer 1

		A	B	C	D
	Year	0	1	2	3
1	Base Price	-240,000
2	Modification Cost	-36,000
3	Increase IN NWC	-8,000
4	Labour Cost Savings		66,000	66,000	66,000
5	Depreciation MACRS Rate		33%	45%	15%
6	Depreciation =(Base Price + Modification Cost)* Depreciation Rate		91080	124200	41400
7	EBIT = Labour Cost Savings - Depreciation		-25,080	-58,200	24,600
8	Tax = EBIT* Tax Rate		-10032	-23280	9840
9	EAT= EBIT-Tax		-15,048	-34,920	14,760
10	Depreciation		91080	124200	41400
11	After Tax Salvage Value				64800
12	Free Cash Flow	-284,000	76,032	89,280	120,960
13	Discount Rate	13%
	NPV	-62,964.36
	NPV using excel formula = NPV(A13,B12:D12)+A12

a) Initial Investment = -62964.36
b) In year 1 cash flkow = 76,032
In year 2 cash flow =  89,280
In year 3 cash flow = 120,960

c) Since NPV = -62964.36, since value is negative hence, spectrometer should not be purchased.
Hence No.