Question

Excel Online Structured Activity: New project analysis

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $47,500 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 $85,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $30,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below.

Open the spreadsheet and perform the required analysis to answer the questions below.

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.

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 $

If the WACC is 14%, should the spectrometer be purchased?

Answer 1

Initial Outlay of the Project is -$247,500

Cash Flow in Year 1 is $49,350

Cash Flow in Year 2 is $60,750

Cash Flow in Year 3 is $100,200

NPV of the Project is -89,833.23

Spectrometer should not be purchased since NPV is negative

Calculation of Project's NPV
Particulars	Year 0	Year 1	Year 2	Year 3
Initial Investment
Spectrometer price	-190000
Cost of Modification	-47500
Working Capital required	-10000
Net Initial Investment (A)	-247500
Operating Cashflows
Reduction in Costs (B)		30000	30000	30000
Less: Depreciation(C) ($237,500 * 33%, 45%,15%)		78375	106875	35625
Profit Before tax (D = B-C)		-48375	-76875	-5625
Less: Tax@40% (E = D*40%)		-19350	-30750	-2250
Profit After Tax (F = D-E)		-29025	-46125	-3375
Add back Depreciation (G =C)		78375	106875	35625
Net Operating Cashflows (H = F+G)		49350	60750	32250
Terminal Value
Salve value (I)				85500
Less: Unclaimed Depreciation (J)            ($237,500 *7%)				16625
profit before tax (K = I-J)				68875
Less: Tax@40% (L= K*40%)				27550
Profit After Tax (M = K-L)				41325
Add back Depreciation (N = J)				16625
Net Salvage value (O = M+N)				57950
Working capital realized (P )				10000
Net Terminal value (Q = O+P)				67950
Total Cashflows (S = A+H+Q)	-247500	49350	60750	100200
Discount Rate @14% (1+14%)^n n=0,1,2,3	1	0.877192982	0.769467528	0.674971516
Discounted Cashflows	-247500	43289.47368	46745.15235	67632.14592
Net Present Value	-89833.23