Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $130,000, and it would cost another $32,500 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 $52,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $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 $76,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%. 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. $ 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: $ If the WACC is 11%, should the spectrometer be purchased?

Answer 1

1). Initial investment outlay = 175,500.00

2). Annual cash flows:

CF1 = 68,356.44

CF2 = 74,680.94

CF3 = 108,837.63

3). NPV = 26,276.23

The spectrometer can be purchased as it has a positive present worth.

Calculations are shown in the tables below:

3-year MACRS schedule:

Note: MACRS depreciation rates have not been rounded off as given in the question. Exact rates are taken so values may differ slightly.

NPV calculation: