Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $270,000, and it would cost another $40,500 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 $135,000. 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 $65,000 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 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.

Answer 1

C3 : r X C fix D =310500*0.33 E A B F G H I J K L M Depreciati on Cost 1 Year savings 20 3 1 $65,000 4 2 $65,000 5 3 $65,000 6 Depreciati Operating Net working Free Cash PVIF@ Present PBT Tax@40% Net income on cash flows capital Investment flows 10% value | $ (14,000) $ (310,500) $ (324,500)| 1.000-$324,500.00 $ (37,465) $ (14,986) $ (22,479) $ 102,465 $ 79,986 $ 79,986 0.909 $72,714.55 $ (74,725) $ (29,890) $ (44,835) $139,725 $ 94,890 | $ 94,890 0.826 $78,421.49 $ 18,425 $ 7,370 $ 11,055 $ 46,575 $ 57,630 $ 14,000 $ 89,694 $ 161,324 0.751 $121,205.11 $102,465 $139,725 $ 46,575 Net present value -$52,158.86 Year 0 -$324,500 Asset cost Less: Depreciation charged $ 310,500 $ 288,765 $ 21,735 WDV at the time of sale Sale value of machine $ 135,000 Year 1 Year 2 Year 3 $ 79,986 $ 94,890 $ 161,324 Profit/(Loss) on sale Less: Tax @40% After tax cash salvage value $ 113,265 $ 45,306 $ 89,694 17 No, Spectrometre should not be purchased, NPV < $0

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