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.
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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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.
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