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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
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 35%.

  1. a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?
  2. b. What are the project's annual cash flows in Years 1, 2, and 3?
  3. c. If the WACC is 9%, should the spectrometer be purchased? Explain.

a.

Summary Introduction

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.

Explanation

Cost of spectrometer is $140,000.

Cost of modify is $30,000.

Working capital is $8,000.

Formula to calculate the initial investment outlay:

Initialinvestmentoutlay=Costofspectrometer+costformodify+workingcapital

b.

Summary Introduction

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.

Summary Introduction

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.

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