You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $90,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $24,000. The equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $32,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. a. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $ b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $ Year 2: $ Year 3: $ c. If the WACC is 12%, should the spectrometer be purchased? -Select-

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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You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications
is $90,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $24,000. The
equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues,
but it should save the firm $32,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.
a. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter
your answer as a positive value. Round your answer to the nearest dollar.
b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
Year 1: $
Year 2: $
Year 3: $
c. If the WACC is 12%, should the spectrometer be purchased?
-Select- V
Transcribed Image Text:You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $90,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $24,000. The equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $32,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. a. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $ Year 2: $ Year 3: $ c. If the WACC is 12%, should the spectrometer be purchased? -Select- V
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