Question

NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $300,000, and it would cost another $75,000 equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $120,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $21,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. a. What is the initial investment outlay for the spectrometer, that is, what is the Year O project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. b. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 15 In Year 25 In Year 3 c. If the WACC is 115, should the spectrometer be purchased? No

Answer 1

1.
=-300000-75000-11000=-386000

2.
=(21000-375000*33%)*(1-40%)+375000*33%=62100

3.
=(21000-375000*45%)*(1-40%)+375000*45%=80100

4.
=(21000-375000*15%)*(1-40%)+375000*15%=35100

5.
No because NPV is negative

NPV=-300000-75000-11000+((21000-375000*33%)*(1-40%)+375000*33%)/1.11+((21000-375000*45%)*(1-40%)+375000*45%)/1.11^2+((21000-375000*15%)*(1-40%)+375000*15%)/1.11^3+11000/1.11^3+(120000-(120000-375000*7%)*40%)/1.11^3=-171011.885515903