Problem 12-8 New project analysis You must evaluate a proposed spectrometer for
ID: 2764452 • Letter: P
Question
Problem 12-8
New project analysis
You must evaluate a proposed spectrometer for the R&D department. The base price is $170,000, and it would cost another $42,500 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 $59,500. 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 $72,000 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 10%, should the spectrometer be purchased?
-Select-yesno
Explanation / Answer
Book value at the end of 3 years = 7% *222500=15575
Market value =59500
Market Value - Book value =Gain =43925
Tax on This =40% of gain =17570
Aftre tax cashflows =26355
Project should be rejected as the NPV is negative
Cost Savings 72000 72000 72000 Depreciation 33% 45% 15% Depreciation 73425 100125 33375 PBT -1425 -28125 38625 Tax 15450 PAT -1425 -28125 23175 Initial Investment -222500 Increasein net working capital -5000 Aftre tax cashflows 26335 Release of WC 5000 Cahflows -227500 72000 72000 87885 -33,192.75