New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2723816 • Letter: N
Question
New project analysis
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 $54,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $76,000 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 14%, should the spectrometer be purchased?
-Select-yesno
Explanation / Answer
Purchase price- -$180000
Shipping and installation costs- -$36000
Increase in net working capital- -$9000
-$225000
2)
The operating cash flows of the project can be worked out as:
Year1
Year2
Year3
After Tax Savings
45600
45600
45600
Depreciation tax savings
28512
38880
12960
Net cash flow
17088
6720
32640
After Tax Savings
(76000)(1-.40)
Depreciation
216000
216000
216000
0.33
0.45
0.15
Depreciation exp
71280
97200
32400
Depreciaiton tax saving (0.40)
28512
38880
12960
The operating cash flows of the project can be worked out as:
Year1
Year2
Year3
After Tax Savings
45600
45600
45600
Depreciation tax savings
28512
38880
12960
Net cash flow
17088
6720
32640
After Tax Savings
(76000)(1-.40)
Depreciation
216000
216000
216000
0.33
0.45
0.15
Depreciation exp
71280
97200
32400
Depreciaiton tax saving (0.40)
28512
38880
12960