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 25%. What is the initial investment outlay for the spectrometer, that is, what is the Year O project cash flow? $ What are the project's annual cash flows in Years 1, 2, and 3? Year 1 $ Year 2 $ Year 3 $ If the WACC is 10%, what is the project's NPV $ Should the spectrometer be purchased? Yes/No
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 25%. What is the initial investment outlay for the spectrometer, that is, what is the Year O project cash flow? $ What are the project's annual cash flows in Years 1, 2, and 3? Year 1 $ Year 2 $ Year 3 $ If the WACC is 10%, what is the project's NPV $ Should the spectrometer be purchased? Yes/No
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 25%.
What is the initial investment outlay for the spectrometer, that is, what is the Year
O project cash flow? $
What are the project's annual cash flows in Years 1, 2, and 3?
Year 1 $
Year 2 $
Year 3 $
If the WACC is 10%, what is the project's NPV $
. Should the
spectrometer be purchased? Yes/No
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