NEW PROJECT ANALYSIS You must evaluate 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 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 net cost of the spectrometer; that is, what is the Year 0 project cash flow? b. What are the project's annual net cash flows in Years 1, 2, and 3? c. What is the terminal cash flow? d. If the WACC is 12%, should the spectrometer be purchased? Explain.
NEW PROJECT ANALYSIS You must evaluate 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 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 net cost of the spectrometer; that is, what is the Year 0 project cash flow? b. What are the project's annual net cash flows in Years 1, 2, and 3? c. What is the terminal cash flow? d. If the WACC is 12%, should the spectrometer be purchased? Explain.
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
Related questions
Question
NEW PROJECT ANALYSIS You must evaluate 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 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 net cost of the spectrometer; that is, what is the Year 0 project cash flow? b. What are the project's annual net cash
flows in Years 1, 2, and 3? c. What is the terminal cash flow? d. If the WACC is 12%, should the spectrometer be purchased? Explain.
Expert Solution
Step by step
Solved in 9 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub