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NEW PROJECT ANALYSIS 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 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 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.
a.
To determine: initial investment outlay for spectrometer.
Introduction:
MACRS:
MACRS stands for the Modified Accelerated Cost Recovery System. It is a king of depreciation method where the assets are divided in the classes and deprecation are charged according to classes.
Cost of spectrometer is $140,000.
Cost of modify is $30,000.
Working capital is $8,000.
Formula to calculate the initial investment outlay:
b.
To determine: cash flow for the 1st and 2nd year.
Introduction:
MACRS:
MACRS stands for the Modified Accelerated Cost Recovery System. It is a king of depreciation method in which assets are divided in the classes and deprecation are charged according to classes.
c.
To identify: the project should be accepted or not.
Introduction:
MACRS:
MACRS stands for the modified accelerated cost recovery system. It is a king of depreciation method where the assets are divided in the classes and deprecation are charged according to classes.
Chapter 12 Solutions
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