You must evaluate a proposed spectrometer for the R&D department. The base price is $180,000, and it would cost another $27,000 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 $90,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $21,000 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.
What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. i
If the WACC is 12%, should the spectrometer be purchased?
Using NPV as a Decision Tool:
Decision on whether to invest on a project is determined by Net Present Value. If NPV is equal to or greater than zero, the investment is treated as viable investment which will add value to the company. A negative NPV means the project will negatively impact the value of the company and the projected should be rejected.
Answer and Explanation:
Initial Investment outlay
Depreciable amount is calculated as base price plus the modification cost
- $180,000 + $27,000 = $ 207,000
Year 0 projected...
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from Financial Accounting: Help and ReviewChapter 4 / Lesson 1