ZuoTi.Pro
Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $260,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $79,000. The equipment would require a $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $77,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

  1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.
    $  

  3. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
    Year 1: $  
    Year 2: $  
    Year 3: $  

  5. If the WACC is 11%, should the spectrometer be purchased?
    -Select-YesNo
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1
Time line 0 1 2 3
Cost of new machine -260000
Initial working capital -13000
=a. Initial Investment outlay -273000
3 years MACR rate 33.33% 44.45% 14.81% 7.41%
Savings 77000 77000 77000
-Depreciation =Cost of machine*MACR% -86658 -115570 -38506 19266 =Salvage Value
=Pretax cash flows -9658 -38570 38494
-taxes =(Pretax cash flows)*(1-tax) -7243.5 -28927.5 28870.5
+Depreciation 86658 115570 38506
=after tax operating cash flow 79414.5 86642.5 67376.5
reversal of working capital 13000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 59250
+Tax shield on salvage book value =Salvage value * tax rate 4816.5
=Terminal year after tax cash flows 77066.5
b. Total Cash flow for the period -273000 79414.5 86642.5 144443
Discount factor= (1+discount rate)^corresponding period 1 1.11 1.2321 1.367631
Discounted CF= Cashflow/discount factor -273000 71544.59459 70320.99667 105615.4767
c. NPV= Sum of discounted CF= -25518.93

Reject as NPV is negative

0 1
Add a comment
Know the answer?
Add Answer to:
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $290,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $65,000. The equipment would require an $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 $50,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $250,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $87,000. The equipment would require a $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 $59,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $60,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $27,000. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $41,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $300,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $33,000. The equipment would require an $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 $44,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $160,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $61,000. The equipment would require a $6,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $51,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $120,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $41,000. The equipment would require a $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 $34,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $60,000, and the equipment will be fully deprecated at the time of purchase. The equipment would be sold after 3 years for $24,000. The equipment would require a $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 $53,000 per year in before-tax labor...

  • 12.8 You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase...

    12.8 You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $210,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $87,000. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $31,000 per year in before-tax...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

    You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $250,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $103,000. The equipment would require a $6,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $60,000 per year in before-tax labor...

  • You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price...

    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 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 $90,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT