Question

5. Problem 12.08 Click here to read the eBook: Analysis of an Expansion Project NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $250,000, and it would cost another $37,500 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 $87,500. 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 $56,000 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 1 $ In Year 2$ In Year 3 $ c. If the WACC is 14%, should the spectrometer be purchased? -Select- Grade It Now Save & Continue Continue without saving

Answer 1

C3 - B X C Fax D =287500*0.33 E A F G H I J K L M Net Cost Depreciati Net Depreciati Operating working Annual 1 Year savings on PBT Tax@40% income on cash flows capital Investment Cash flows 2 0 $ (11,000) $ (287,500) $ (298,500) 1 $ 56,000$ 94,875 | $ (38,875) $ (15,550) $ (23,325) $ 94,875 $ 71,550 $ 71,550 4 2 $ 56,000 $129,375 $ (73,375) $ (29,350) $ (44,025) $129,375 $ 85,350 | $ 85,350 3 $ 56,000 $ 43,125 $ 12,875 $ 5,150 $ 7,725 $ 43,125 $ 50,850 $ 11,000 $ 60,550 $ 122,400 PVIF@ 14% 1.000 0.877 0.769 0.675 Present value $298,500.00 $62,763.16 $65,674.05 $82,616.51 5 Net present value -$87,446.27 Year o $ (298,500) 11 Asset cost $ 287,500 10 Less: Depreciation charged $ 267,375 WDV at the time of sale $ 20,125 Year 1 12 Sale value of machine $ 87,500 Year 2 13 Profit/(Loss) on sale $ 67,375 Year 3 Less: Tax @40% $ 26,950 After tax cash salvage value $ 60,550 16 17 No, Spectrometre should not be purchased, NPV < $0. $ 71,550 $ 85,350 $ 122,400

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