New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2724172 • 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-yesnoItem 5
Explanation / Answer
Initial cash flow =$ 180,000+36,000+9,000
=225,000
annual cash flow Year 1 2 3
after tax saving 45,600 45,600 45,600
tax benefit of Dep 28512 43,740 12,960
working capital release 9,000
scrap value 54,000
tax payment .40(54,000-15120) (15,552)
CFAT 74,112 89,340 106,008
dis factor .877 .769 .675
PV of cash inflow 64,996 68,702 71,555
total PV Ocash flow 205253
initian cash flow 225000
NPV (19747)
project should not be initiated