12-8 NEW PROJ ECT ANALYSIS You must evaluate the purchase of a proposed spectrom
ID: 2791812 • Letter: 1
Question
12-8 NEW PROJ ECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D; department. The base price is $140,000, and it would cost another $30,000 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 $60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 12A. 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 $50,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%. a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? b. What are the project's annual cash flows in Years 1, 2, and 3? C. If the WACC is 9%, should the spectrometer be purchased? Explain.Explanation / Answer
a) Capitalised cost of equipment= 140000+30000= $ 170000
Working capital : 8000
Total initial cash outflow for year 0 : -170000-8000= -178000
b)
**Book value at end of year 3 = 170000(1-.33-.45-.15] = 11900
Gain on sale = 60000-11900= 48100
Tax on gain = 48100*.35= 16835
After tax sale value : 60000-16835 = 43165
c)Present value of cash flow =[PVF9%,1*CF1]+[PVF9%,2*CF2]+[PVF9%,3*CF3]
= [.91743*52135]+[.84168*59275]+[.77218*92590]
= 47830.21+ 49890.58+ 71496.15
= 169216.94
NPV =present value -initial cash flow
169216.94-178000
= -8783.06
since NPV is negative ,equipment should not be purchased.
=
Year 1 2 3 Savings 50000 50000 50000 Less:depreciation -56100 [170000*.33] -76500 [170000*.45] -25500 [170000*.15] Income before t ax -6100 -26500 24500 Less:Tax -2135 [ -6100*.35 -9275 [-26500*.35] 8575 [24500*.35] Net Income -3965 [-6100-(-2135)] -17225 [26500-(-9275)] 15925 Add:depreciation(non cash) 56100 76500 25500 Cash flow 52135 [-3965+56100] 59275 41425 After tax sale value 43165 Working capital 8000 Cash flow 52135 59275 92590Related Questions
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