You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $140,000, and it would cost another $30,000 to modifythe equipment for special use by the firm. The equipment falls into the MACRS 3-yearclass 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 $8,000increase in net operating working capital (spare parts inventory). The project would haveno effect on revenues, but it should save the firm $50,000 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 0project cash flow?b. What are the project’s annual cash flows in Years 1, 2, and 3?c. If the WACC is 9%, should the spectrometer be purchased? Explain.
You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $140,000, 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 $60,000. The applicable
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 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?
b. What are the project’s annual cash flows in Years 1, 2, and 3?
c. If the WACC is 9%, should the spectrometer be purchased? Explain.
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