You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price...

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You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer incl

business finance

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Answer 1

Answer #1

a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital - Tax savings on depreciation
202500
i.e. $202,500



b.Annual Cash Flows:

	Year 1	2	3
Savings in Cost	59,000	59,000	59,000
Less: Depreciation	0	0	0
Net Savings	59,000	59,000	59,000
Less: Tax @25%	14,750.00	14,750.00	14,750.00
Income after Tax	44,250.00	44,250.00	44,250.00
Add: Depreciation	0	0	0
Cash Flow	44,250.00	44,250.00	44,250.00
Add: After tax salvage value			65,250.00
Recovery of Working capital			15,000
Cash Flow	44,250.00	44,250.00	124,500.00

c.NPV = Present value of cash inflows – present value of cash outflows
= 44250PVF(10%, 1 year) + 44250PVF(10%, 2 years) + 124500*PVF(10%, 3 years) – 202500
-32163.78663

No, should not be purchased (since NPV is negative)

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Answer 2

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