You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $22,000 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 $33,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $14,000 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 35%.
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. $
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: $
If the WACC is 10%, should the spectrometer be purchased?
Operating cash flow (OCF) each year = income after tax + depreciation
At the end of year 3, the entire working capital investment is recovered.
profit on sale of equipment at end of year 4 = sale price - book value
book value = original cost - accumulated depreciation
after-tax salvage value = salvage value - tax on profit on sale of equipment
NPV is calculated using NPV function in Excel
Year 0 cash flow = -$146,000.00 (total cost of spectrometer + investment in NOWC)
Year 1 cash flow = $65,296.00
Year 2 cash flow = $70,840.00
Year 3 cash flow = $86,424.00
NPV is $36,837.08
The spectrometer should be purchased as the NPV is positive.
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price...
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