Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1-33.33%, Year 2-44.44%, Year 3 - 14.82%, and Year 4 -7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What amount should be used as the initial cash flow for this project? Why?

Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1-33.33%, Year 2-44.44%, Year 3 - 14.82%, and Year 4 -7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What amount should be used as the initial cash flow for this project? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 14P

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Ogren Corporation is considering purchasing a new spectrometer for the firm’s R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1 - 33.33%, Year 2 - 44.44%, Year 3 - 14.82%, and Year 4 - 7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm’s tax rate is 40%, and the required rate of return on the project is 11%. What amount should be used as the initial cash flow for this project? Why?
Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1-33.33%, Year 2 - 44.44%, Year 3 - 14.82%, and Year 4 - 7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per vear in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What is the after-tax salvage value for the spectrometer?
You must evaluate the purchase of a proposed spectrometer for the RAD department. The base price is $120,000, and it would cost another $30,000 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 $42,000. The applicable depreciation rates are 33%, 45%, 15%, and 75%. The equipment would require a $50,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $32,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. Using the same data above, instead of MACRS depreciation method, the entity will use the straight-line method. Determine: 1. Project’s annual cash flows in Years 1, 2 and 3. 2. Calculate NPV, using the 12% WACC. 3. Should the equipment be purchased using the straight-line method of depreciation? Why?
Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1- 33.33%, Year 2- 44.44%, Year 3 - 14.82%, and Year 4 - 7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What is the NPV of the project? Should the firm accept or reject this project?
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You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $150,000, and it would cost another $22, 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 $52, 500. The applicable depreciation rates are 33%, 45% , 15%, and 7%. The equipment would require a $13, 000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $30,000 per year in before - tax labor costs. The firm's marginal federal - plus - state tax rate is 40%. 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. $ 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…
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You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $280,000, and it would cost another $42,000 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 $84,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $48,000 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 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by…
You must evaluate the purchase of a spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 to modify the equipement for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $50,000 per year in before tax labor costs. The firms marginal federal plus state tax rate is 40%. The firms WACC is 12%. What is the inital investment outlay for the project? That is, what is the Year 0 project cash flow? What is the projects incremental depreciation for year 1? What is the projects annual cash flow for year 1? What is the projects annual cash flow for year 2? What is the projects incremental depreciation for year 3? What…
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