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7.  Problem 12.08 (New Project Analysis) eBook You must evaluate the purchase of a proposed spectrometer for...

7.  Problem 12.08 (New Project Analysis)

eBook

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $270,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $80,000. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $25,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

  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 dollar.
    $  

  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 dollar.
    Year 1: $  
    Year 2: $  
    Year 3: $  

  5. If the WACC is 13%, should the spectrometer be purchased?
    Yes or No

Solutions

Expert Solution

1) Capital Outlay = Purchase price of new machine + Investment in Working Capital
= 270000 + 9000
Capital Outlay = $279,000

2) Annual Cash Flows
Year 1 = $108,750
Year 2 = $108,750
Year 3 = $177,750

3) Since the NPV of the project is $ 25,595.81. Therefore, we should go ahead with this project

jeff jeffy answered 1 year ago
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