Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $60,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $27,000. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $41,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

a. 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 dollar.

$

b. 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 dollar.

Year 1$

Year 2$

Year 3$

c. If the WACC is 11%, should the spectrometer be purchased?

Answer 1

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- 2x Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select VD VE 652 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste BIU - D A SF Merge Merge & Center - Center $ % % , 4:0 .00 :.: Format Painter Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells VE650 _ UX UY UZ VA VB VC VD 648 649 100% BONUS DEPRECIATION - > (60000*(1-0.25)] (AFTER TAX COST OF EQUIPMENT] 650 651 YEAR 1 COST OF ASSET -45000 653 WORKING CAPITAL -10000 654 SAVINGS IN LABOR COSTS 41000.00 41000.00 41000.00 655 LESS COSTS 656 LESS DEPRECIATION 0.00 0.00 0.00 657 = INCOME BEFORE TAX 41000.00 41000.00 41000.00 658 LESS 10250.00 10250.00 10250.00 659 = NET INCOME 30750.00 30750.00 30750.00 660 ADD DEPRECIATION 0.00 0.00 0.00 OPERATING CASH FLOW -55000 30750.00 30750.00 30750.00 662 ADD RECOVERY OF WORKING CAPITAL 10000.00 663 ADD AFTER TAX SALVAGE VALUE OF ASSET 20250.00 [27000*(1-0.25)] 664 NET CASH FLOW -55000 30750.00 30750.00 61000.00 665 PV FACTOR AT 11% 0.9009 0.8116 0.7312 666 PV OF CFAT -55000 27702.70 24957.39 44602.67 42262.77 667 NPV 42262.77 NPV MI-np-ir_REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN indiffEPS EBIT Red ferences: ED12 ...B TAX 661 LEASE GOLAU STRAIGHT LINE BOJ 120% O 199 * OENG 24-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A pt General Wrap Text Merge Merge & Center - Center SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells VA VB VC VD VE Calibri 11 AA = = = E Copy Paste Format Painter BIU - D A Clipboard Font UY670 1 UX UY U Z 670 671 672 YEAR O CASH FLOW 673 YEAR 1 CASH FLOW 674 YEAR 2 CASH FLOW 675 YEAR 3 CASH FLOW -55000 30750 30750 61000 [INCLUDING WORKING CAPITAL RECOVERY AND AFTER TAX SALVAGE ] 42262.77 676 C NPV 677 678 YES, as NPV is POSITIVE, machine should be purchased 679 680 681 682 683 684 685 686 687 688 689 690 I N HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE MI-np-ir_REPLACEMENT S ferences: DX15 STRAIGHT LINE BOJ 120% GOLFI - Rea O 24-11-2019