Question

8. Problem 12.08 (New Project Analysis) eBook You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $22,000 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 $44,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $73,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35% 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 cent. 144000 $ 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 cent Year 1: Year 2: Year 3: c. If the WACC is 13%, should the spectrometer be purchased? Yes

Answer 1

X ✓ fc D =132000*0.33 E A B C F G H I J K L Cost Depr PBT Tax@35% 1 2 Depreciati Year savings on ol 1 $ 73,000 $ 43,560 2 $ 73,000 $ 59,400 3 $ 73,000 $ 19,800 Net Depreciati Operating Net working Annual PVIF@ income on cash flows capital Investment Cash flows 13%. $ (12,000) $ (132,000) $ (144,000) 1.000 $ $ 19,136 $ 43,560 $ 62,696 $ 62,696 0.885 $ $ 8,840 $ 59,400 $ 68,240 $ 68,240 0.783 % $ 34,580 $ 19,800 $ 54,380 $ 12,000 $ 31,834 $ 98,214 0.693 $ 3 4 $ 29,440 $ 13,600 $ 53,200 $ 10,304 $ 4,760 $ 18,620 Present value (144,000.00) 55,483.19 53,441.93 68,067.23 Net present value $ 32,992.34 Year 0 -$144,000 Asset cost Less: Depreciation charged $ 132,000 $ 122,760 $ 9,240 $ 44,000 $ 34,760 $ 12,166 $ 31,834 Year 1 Year 2 Year 3 WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @35% After tax cash salvage value 16 17 Yes, NPV > $0. $ 62,696 $ 68,240 $ 98,214

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