You must evaluate a proposed spectrometer for the R&D department. The base price
ID: 2764747 • Letter: Y
Question
You must evaluate a proposed spectrometer for the R&D department. The base price is $180,000, 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 $45,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $38,000 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 11%, should the spectrometer be purchased?
-Select-yesnoItem 5
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 11%, should the spectrometer be purchased?
-Select-yesnoItem 5
Explanation / Answer
The details on which cash flow calculation and NPV will be calculated are given below
The intial investment outlay for the spectrometer at 0 year will be the total of base price $1,80,000 and modification charges of $36,000 the total amount will be $216,000
The life of spectrometer will be for 3 years
The salvage value at the end of three years is $45,000
The depreciation rates from year 1 to 3 are 33%,45%,15% on $216,000 value of spectrometer as the modification charges will be added in asset value
The cost of capital is 11%
The tax rate is 40%
The savings in labor $38,000 per year before tax
The cash flows calculations for year wise are given below
the calculation of NPV
the present value of cashflows for 3 years are $75,755
The present value of salvage value of asset at the end of 3 years is =$45,000 x 0.7311 = $32,899.50
Total present value of cash inflow is $ 108,654 which is less than intial cash outlay of $216,00o as such there should be no purchase
year savings spares part inventory cost depreciation net profit tax @ 40% net inflow after tax Add :depreciation annual cash inflow present value factor at 11% Present value of cash flows a b c C=a-b-c d E=C-D f G=E+F 1 38,000 7,000 71280 -40,280 0 -40,280 71280 31,000 0.900901 27927.93 2 38,000 7,000 97200 -66,200 0 -66,200 97200 31,000 0.811622 25160.3 3 38,000 7,000 32400 -1,400 -1,400 32400 31,000 0.731191 22666.93 75755.16Related Questions
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