New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2646858 • Letter: N
Question
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $27,500 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 $27,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $42,000 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?
-Select-yesnoItem 5
Explanation / Answer
1) Cost of investment at T0 Base price -110000 Modification -27500 Increase in NOWC -15000 Cash Outlay for new Machine -152500 2) Year 1 Year 2 year 3 After tax savings 24000 24000 24000 Depreciation Tax savings 18150 24750 8250 Net operating cash flow 42150 48750 32250 Note : After tax savings =40000* (1-0.4) 24000 The depreciation expense in each year is the depreciable basis 137500 times MACRS allowance pecentage of 0.33 , 0.45 , 0.15 for 1, 2 and 3 years respecively. Depreciation expense Depreciation tax savings (40%) 137500 0.33 45375 18150 137500 0.45 61875 24750 137500 0.15 20625 8250 Terminal cash flow = Salvage value 27500 tax on sv* -7920 Return on NOWC 15000 Terminal value 34580 tax on sv* 7920 Remaining BV in 4th year = 110000/0.07 7700 3) Year Net cash flow PV factor @10% PV @10% 0 -152500 1.0 -152500 1 42150 0.9 42150 2 48750 0.8 48750 3 66830 0.8 66830 NPV of 5230