New project analysis You must evaluate a proposed spectrometer for the R&D depar
ID: 2762565 • Letter: N
Question
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $290,000, and it would cost another $72,500 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 $101,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $73,000 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 12%, should the spectrometer be purchased?
-Select-yesnoItem 5
Explanation / Answer
depreciable value depr rate dep amount base price 290000 vale of machine 217500 116000 33% 38280 modification charges 72500 scrap value 101500 116000 45% 52200 value of machinary 217500 depreciable amount 116000 116000 15% 17400 116000 7% 217500 increase in working capital 5000 Net cash outflow 222500 Year saving depreciation saving after dep Tax@40% saving after tax depreciation saving after tax before depreciation present value of cash flow present value @12% 1 73000 38280 34720 13888 20832 38280 59112 0.892857 52778.57 2 73000 52200 20800 8320 12480 52200 64680 0.797194 51562.5 3 73000 17400 55600 22240 33360 17400 50760 0.71178 36129.97 101500 0.71178 72245.7 5000 0.71178 3558.901 present value of cash flow 216275.6 cash outflow 222500 NPV -6224.37 Machine should not be purchased as NPV Is negative