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 is the projects operating cash flow for year 3? What is the projects cash flow from the sale of the equipment in year 3? What is the projects cash flow from the liquidation of net operating working capital in year 3? What is the projects teminal cash flow for year 3? What is the projects NPV? What is the projects IRR? MIRR?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 7P

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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 is the projects operating cash flow for year 3?

What is the projects cash flow from the sale of the equipment in year 3?

What is the projects cash flow from the liquidation of net operating working capital in year 3?

What is the projects teminal cash flow for year 3?

What is the projects NPV?

What is the projects IRR? MIRR?

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