Could someone help me with a step by step approach to this question? Thank you!
ID: 2668229 • Letter: C
Question
Could someone help me with a step by step approach to this question? Thank you!12-7 NEW PROJECT ANALYSIS - You must evaluate 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 40%.
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 12%, should the spectrometer be purchased? Explain.
Explanation / Answer
http://docs.google.com/viewer?a=v&q=cache:MWNzvw9rTIsJ:fin221.home.mchsi.com/files/12fin221_spr08_apr17X4.pdf+The+base+price+is+%24140,000,+and+it+would+cost+another+%2430,000+to+modify+the+equipment+for+special+use+by+the+firm&hl=en&gl=us&pid=bl&srcid=ADGEESiWVlW5nxRSs4CLOJJavfS4Bp3lT00U_F1hgZXVZnI1AVng6ooJgPIiux-MAQkQgnw6g-eJKgklZqHqCbUmM5l7Ften-SaLP8YiAy4ktz9mvFmxdTShEBoCbdxOsw1ZJwN-FqJA&sig=AHIEtbRqgfHAddBOtdzszvjFna5-ddvaIg solution is here