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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 $180,000, and it would cost another $36,000 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 $54,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $21,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

  1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.

    $  

  2. 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 $  

  3. If the WACC is 10%, should the spectrometer be purchased?

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Answer #1
Time line 0 1 2 3
Cost of new machine -216000
Initial working capital -7000
=a. Initial Investment outlay -223000
3 years MACR rate 33.00% 45.00% 15.00% 7.00%
Savings 21000 21000 21000
-Depreciation =Cost of machine*MACR% -71280 -97200 -32400 15120 =Salvage Value
=Pretax cash flows -50280 -76200 -11400
-taxes =(Pretax cash flows)*(1-tax) -30168 -45720 -6840
+Depreciation 71280 97200 32400
=after tax operating cash flow 41112 51480 25560
reversal of working capital 7000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 32400
+Tax shield on salvage book value =Salvage value * tax rate 6048
=Terminal year after tax cash flows 45448
b. Total Cash flow for the period -223000 41112 51480 71008
Discount factor= (1+discount rate)^corresponding period 1 1.1 1.21 1.331
Discounted CF= Cashflow/discount factor -223000 37374.54545 42545.45455 53349.36138
c. NPV= Sum of discounted CF= -89730.64

Reject project as NPV is negative

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