You must evaluate the purchase of a 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 4 year class and would be sold after 4 years for $60,000. The applicable depreciation rates are 33%, 45%, 15% and 7%. The equipment would require an $8000 increase in net operating working capital. The project would have no effect on revenues, but it should save the firm $50,000 per year before-tax labour costs. The firm's marginal federal-plus state tax rate is 40%. QUESTIONS: 1. What is the initial investment outlay for the spectrometer, that is, what is the year 0 project cash flow? 2. What are the project's annual cash flows in Years 1, 2,3 and 4? 3. If the WACC is 12%, should the spectrometer be purchased? Exp
You must evaluate the purchase of a 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 4 year class and would be sold after 4 years for $60,000. The applicable
QUESTIONS:
1. What is the initial investment outlay for the spectrometer, that is, what is the year 0 project cash flow?
2. What are the project's annual cash flows in Years 1, 2,3 and 4?
3. If the WACC is 12%, should the spectrometer be purchased? Explain.
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