New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2753750 • Letter: N
Question
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $28,500 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 $66,500. 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 $49,000 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 11%, should the spectrometer be purchased
Explanation / Answer
Statement showing calculation of cash flows
Calculation of NPV
= 54480x0.901 + 63600x0.812 + 96700x0.731 - 190000-28500-12000
= -59083
Spectrometre should not be purchased
Working notes:
Calculation of cash inflows
1 2 3 Cash inflows 54480 63600 44800 Release of WC 12000 Salvage value of machine (Net of tax) 39900 Cash flows 54480 63600 96700