Question

Jellis - Cash Flow Estimation and Risk Analysis Search this coul < Back to Assignment Attempts: Keep the Highest: 5 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 $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 $150,000. 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 $77,000 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 s In Year 3 $ C. If the WACC is 14%, should the spectrometer be purchased? -Select- Orade it New Continue without saving 2

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins - 2x = = = V General Wrap Text Merge Merge & Center - Center Σ AutoSum : Fill Z Sort & T Find & SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear File Home Insert Page Layout Formulas % Cut Calibri 11 A A Ea Copy Paste B I U B- Format Painter A Clipboard Font RR222 RR RS 203 Filter Editing Select Alignment Number Cells RT RU RV RW RX RY RZ 204 1 2 3 205 206 207 208 209 SPECTROMETER YEAR COST OF ASSET [300000 +75000] WORKING CAPITAL SAVINGS IN COSTS -375000 -11000 77000.00 77000.00 77000.00 210 211 212 213 123750.00 -46750.00 -18700.00 -28050.00 123750.00 95700.00 214 215 216 -386000 DEPRECIATION INCOME BEFORE TAX TAX 40% NET INCOME DEPRECIATION OPERATING CASH FLOW RECOVERY OF WORKING CAPITAL AFTER TAX SALVAGE VALUE OF ASSET NET CASH FLOW PV FACTOR AT 14% PV OF CFAT NPV 168750.00 56250.00 -91750.00 20750.00 -36700.00 8300.00 -55050.00 12450.00 168750.00 56250.00 113700.00 68700.00 11000.00 100500.00 (SEE NOTE) (A-B) 113700.00 180200.00 0.7695 0.6750 87488.46 121629.87 -92934.31 NPV 217 218 219 -386000 220 95700.00 0.8772 83947.37 -386000 221 222 223 -92934.31 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT BO! 120% STIL I RRnpvbeta RATION PBP ARR ferences: B46 O Rea 1 ODOB 9 * ENG 04-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Calibri pt General 11 AA = = = D- DA Wrap Text Merge Merge & Center - Center BI U SF $ 4:0 .00 :.: Insert Delete Format % % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells RS RT RU RV RW RX RY RZ E Copy Paste Format Painter Clipboard RT225 , RR 225 226 227 228 229 230 231 232 YEAR O CASH FLOW YEAR 1 CASH FLOW YEAR 2 CASH FLOW YEAR 3 CASH FLOW -386000 95700 113700 180200 233 234 b NPV -92934.31 235 NO, AS NPV IS NEGATIVE, MACHINE SHOULD NOT BE PURCHASED 236 237 238 239 240 241 242 243 244 215 N Rea R ΠΙΤΑ IRRnpvbetaRATION PBP ARR invest, EAA ferences: ED12 MI-np-ir REPLACEMENT S HPR GMAM 05nnn 107000 EAC MACRS NPV RELEVANT 11000 BETA LEVERED REPLACEMENT BOND O OPTION TO WAITSTO BO! 120% 1 DOR . * ENG 04-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Calibri A = = = V General 11 A D- DA Wrap Text Merge Merge & Center - Center BI U SF $ 4:0 .00 :.: Insert Delete Format E Copy Paste Format Painter Clipboard SB222 % % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells RZ SB SC SD SE SG 207 SA DEPRECIATION YEAR RATE 208 209 210 33.00% 45.00% 15.00% 7.00% Nm + DEPRECIATION BOOK VALUE 123750 251250 16875082500.00 56250 26250 26250 211 212 213 214 215 216 NOTE SALVAGE VALUE BOOK VALUE PROFIT ON SALE TAX ON PROFIT AFTER TAX SALVAGE VALUE 150000 A 26250 123750 49500.00 B 100500.00 A-B 217 218 (A-B) 219 220 221 222 223 224 225 226 227 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT BO! 120% STIL I RRnpvbeta RATION PBP ARR ferences: ED12 O Rea 1 + DE * ENG 00:23 04-11-2019