Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $140,000, and it would cost another $21,000 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 $70,000. 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 $75,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%.

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 cent.
   $  
2. 
   
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 cent.
   Year 1: $  
   Year 2: $  
   Year 3: $  
4. 
   
5. If the WACC is 13%, should the spectrometer be purchased?

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: $70,000.00 $11,270.00 $58,730.00 3 $75,000.00 $24,150.00 $50,850.00 $17,797.50 $33,052.50 $24,150.00 $57,202.50 $75,000.00 $53,130.00 $21,870.00 $7,654.50 $14, 215.50 $53,130.00 $67,345.50 less: $75,000.00 $72,450.00 $2,550.00 $892.50 $1,657.50 $72,450.00 $74,107.50 add: salvage value less: tax on gain after tax salvage value $70,000.00 $20,555.50 $49,444.50 YEAR Savings depreciation EBT tax @35% EAT depreciation Net operating cash flow initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 13% PRESENT VALUE NPV $161,000.00 $5,000.00 $5,000.00 $166,000.00 $67,345.50 0.88496 $59,597.79 $74,107.50 0.78315 $58,037.04 $49,444.50 $111,647.00 0.69305 $77,376.97 $166,000.00 $29,012 Intial cash flow year 1 year 2 -$166,000.00 $67,346 $74,108 $111,647 $29,012 year 3 NPV Yes