   Chapter 12, Problem 8P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

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 40%. 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 12%, should the spectrometer be purchased? Explain. a. Summary Introduction To compute: Initial investment outlay. Initial Investment Outlay: To start a business or a project, the company needs an amount, this amount is known as the initial investment outlay. It is also known as initial outlay. The amount of initial investment is calculated with the help of capital budgeting technique. Modified accelerated cost recovery system (MACRS): It is another method of calculating the depreciation. This method involves the tax element in the calculation. By this method, the fixed asset of the company is divided into sections and then depreciation is computed. Net present Value (NPV): NPV is the technique of capital budgeting. To choose whether to select or reject a project, it depends on the NPV of the project. If the project has positive NPV, then accept the project, if the NPV is negative, and then reject the project. Explanation Given, Cost of spectrometer is$140,000.

Cost of modification is $30,000. Working capital is$8,000.

Formula to calculate initial investment outlay is,

Initial investment outlay= (Cost of spectrometer+Cost of modification+Working capital)<

b.

Summary Introduction

To compute: The annual cash flows in first, second and third year.

c.

Summary Introduction

To explain: If the WACC is 12% the spectrometer is purchase.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

RATES OF RETURN AND EQUILIBRIUM Stock Cs beta coefficient is bC = 0.4, and Stock Ds is bD = 0.5. (Stock Ds beta...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Explain the difference between cost and expense.

Managerial Accounting: The Cornerstone of Business Decision-Making

Fill in the blanks:

Brief Principles of Macroeconomics (MindTap Course List)

LO4 Purchases returns and allowances are recorded in the general journal.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry) 