New project analysis PLEASE FOLLOW ROUNDING INSTRUCTIONS IN PROBLEM AND ROUND CO
ID: 2762659 • Letter: N
Question
New project analysis PLEASE FOLLOW ROUNDING INSTRUCTIONS IN PROBLEM AND ROUND CORRECTLY
You must evaluate a proposed spectrometer for the R&D department. The base price is $140,000, and it would cost another $28,000 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 $35,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $35,000 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 13%, should the spectrometer be purchased? YES OR NO
Explanation / Answer
Answer
Figures in $
Year
Asset value
MACRS Depreciation rate
Depreciation
Depreciation Tax Benefit
Closing Book value
Sale value
Gain
Tax on gain
Sale value after tax
A
B
C
A*B
C*0.4
Gain * 0.4
1
168000
33.33%
55994.4
22397.76
112005.6
2
168000
44.45%
74676
29870.4
37329.6
3
168000
14.81%
24880.8
9952.32
12448.8
35000
22551.2
9020.48
25979.52
4
168000
7.41%
12448.8
4979.52
(35000-12448.8)
(22551.2*0.4)
(35000-9020.48)
Figures in $
Year
Labor cost saving
Depreciation tax benefit
Purchase and modification of equipment
Salvage value after gain tax
Working capital
Cash flow
Disc Rate : 13%
Present value
A
B
C
D
E
F
G
35000*0.6
As per above table
As per above table
A+B+C+D+E
F*G
0
-168000
-15000
-183000
1.00
-183000.00
1
21000
22397.76
43397.76
0.88
38405.10
2
21000
29870.4
50870.4
0.78
39838.99
3
21000
9952.32
25979.52
15000
71931.84
0.69
49852.37
Net present value
-54903.54
Answer : If the WACC is 13%, The spectrometer should not be purchased as Its net present value is -54903.54.
Figures in $
Year
Asset value
MACRS Depreciation rate
Depreciation
Depreciation Tax Benefit
Closing Book value
Sale value
Gain
Tax on gain
Sale value after tax
A
B
C
A*B
C*0.4
Gain * 0.4
1
168000
33.33%
55994.4
22397.76
112005.6
2
168000
44.45%
74676
29870.4
37329.6
3
168000
14.81%
24880.8
9952.32
12448.8
35000
22551.2
9020.48
25979.52
4
168000
7.41%
12448.8
4979.52
(35000-12448.8)
(22551.2*0.4)
(35000-9020.48)