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
What amount should be used as the initial cash flow for this project? Why?
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