Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $70,000, and it would cost another $17,500 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 $21,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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 $61,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

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 11%, should the spectrometer be purchased?
-Select-YesNo

Answer 1

a.

Initial Investment = Cost of spectrometer + Modification cost + Working capital

= $70,000 + $17,500 + $13,000

= $100,500

Total Initial Investment is $100,500.

Annual Operating cash flow is calculated in excel and screen shot provided below:

Cash flow in year 1 is $48,150, in year 2 is $52,350 and in year 3 is $69,900.

NPN of project is $36,477.09.

Since, NPV of project is a positive value, so project should be accepted.