Question

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NEW PROJECT ANALYSIS

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $290,000, and it would cost another $72,500 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 $72,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $53,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. 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.
   $[ ]

2. 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 $[ ]

3. If the WACC is 14%, should the spectrometer be purchased?yes or no

Answer 1

THIRD YEAR CASH FLOW IS INCLUDING RECOVERY OF WORKING CAPITAL AND AFTER TAX SALVAGE VALUE. IF WE CONSIDER ONLY OPERATING CASH FLOW FOR 3RD YEAR, IT WILL BE = 53550.00