HELP please. You must evaluate a proposed spectrometer for the R&D; department.
ID: 2745900 • Letter: H
Question
HELP please.
You must evaluate a proposed spectrometer for the R&D; department. The base price is $70,000, and it would cost another $10, 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 $31, 500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $28,000 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. $ 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 10%, should the spectrometer be purchased?Explanation / Answer
a. 94500
b.
Year 1 : 27426
Year 2 : 31290
Year 3 : 21630
3. No because NPV = negative (-1045.11)
Time line 0 1 2 3 Cost of equipment -70000 Installation cost -10500 Total investment in new machine -80500 Net working capital -14000 0 0 0 =Initial Investment outlay -94500 Labor savings 28000 28000 28000 MACR rate 33.00% 45.00% 15.00% 7.00% -Depreciation MACR Rate* total investment -26565 -36225 -12075 -5635 =Salvage value = 1435 -8225 15925 -taxes =(savings- depreciation)*(1-tax) 861 -4935 9555 +Depreciation 26565 36225 12075 =after tax operating cash flow 27426 31290 21630 Reversal of Net working capital 14000 Proceeds from sale of assets =selling price*(1 - tax rate) 18900 +Salvage book value * tax rate 2254 Terminal year non operating cash flows 35154 Total Cash flow for the period -94500.00 27426.00 31290.00 56784.00 Discount factor =(1+discount rate)^n 1 1.1 1.21 1.331 Discount rate= 10% Discounted cash flows -94500 24932.727 25859.50413 42662.66 NPV= Sum of discounted cash flows -1045.11Related Questions
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