You must evaluate a proposed spectrometer for the Spam department. The base pric

Question

You must evaluate a proposed spectrometer for the Spam department. The base price is $240,000, and it would cost another $36,000 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 $120,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $44,000 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.

$284,000

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

3. in Year 1 $_____________

4. in Year 2 $_____________

5. in Year 3 $_____________

Explanation / Answer

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. 240000 + 36000+ 8000 = $284,000 2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. 1 2 3 Savings in labour costs 44000 44000 44000 Less Depreciation 91080 83214 15255 Saings before tax -47080 -39214 28745 Less Tax Nil Nil Nil Savings after tax and depreciation 44000 44000 44000 Sold in the last year 120000 Less Tax 13419.6 Cash flows 44000 44000 150580.4

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