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

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $100,000, and it would cost another $25,000 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 $25,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $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 35%.

  1. 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 cent.
    $  

  3. 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 cent.
    Year 1: $  
    Year 2: $  
    Year 3: $  

  5. If the WACC is 14%, should the spectrometer be purchased?
    Select- (Yes/No)

Solutions

Expert Solution

Time line 0 1 2 3
Cost of new machine -125000
Initial working capital -8000
=a. Initial Investment outlay -133000
3 years MACR rate 33.00% 45.00% 15.00% 7.00%
Savings 66000 66000 66000
-Depreciation =Cost of machine*MACR% -41250 -56250 -18750 8750 =Salvage Value
=Pretax cash flows 24750 9750 47250
-taxes =(Pretax cash flows)*(1-tax) 16087.5 6337.5 30712.5
+Depreciation 41250 56250 18750
=after tax operating cash flow 57337.5 62587.5 49462.5
reversal of working capital 8000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 16250
+Tax shield on salvage book value =Salvage value * tax rate 3062.5
=Terminal year after tax cash flows 27312.5
b. Total Cash flow for the period -133000 57337.5 62587.5 76775
Discount factor= (1+discount rate)^corresponding period 1 1.14 1.2996 1.481544
Discounted CF= Cashflow/discount factor -133000 50296.05263 48159.04894 51820.93816
c. NPV= Sum of discounted CF= 17276.04

Accept as NPV is positive

jeff jeffy answered 7 months ago
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