Ogren Corporation is considering purchasing a new spectrometer for the firm’s R&D department.  The purchase price is $70,000 and it would cost another $15,000 to install it.  The spectrometer which falls into the MACRS 3-year property class (Year 1 - 33.33%, Year 2 - 44.44%, Year 3 - 14.82%, and Year 4 - 7.41%) is projected to be sold after three years for $30,000.  Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine.  The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor.  The firm’s tax rate is 40%, and the required rate of return on the project is 11%.               What amount should be used as the initial cash flow for this project? Why?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Ogren Corporation is considering purchasing a new spectrometer for the firm’s R&D department.  The purchase price is $70,000 and it would cost another $15,000 to install it.  The spectrometer which falls into the MACRS 3-year property class (Year 1 - 33.33%, Year 2 - 44.44%, Year 3 - 14.82%, and Year 4 - 7.41%) is projected to be sold after three years for $30,000.  Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine.  The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor.  The firm’s tax rate is 40%, and the required rate of return on the project is 11%.              

What amount should be used as the initial cash flow for this project? Why? 

 

 
 
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