Problem 12-8 New project analysis You must evaluate a proposed spectrometer for
ID: 2751226 • Letter: P
Question
Problem 12-8
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $220,000, and it would cost another $44,000 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 $66,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $37,000 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 $ _____
Explanation / Answer
The initial investment oulay for the spectrometer is $ 276,000 , worked out as follows:
The project's annual cash flows in Year 1 is $ 109,320, Year 2 is $ 141,000, and in Year 3 is $ 61,800
$ Base price 220,000 Modification cost 44,000 Total cost of equipment 264,000 Initial working capital required 12,000 Total initial investment outlay 276,000