Question
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $300,000, and it would cost another $45,000 to
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $300,000, and it would cost another $45,000 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 $105,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $57,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
| Base price | $300,000 | |||
| Additional modification costs | $45,000 | |||
| Before-tax salvage proceeds | $105,000 | |||
| Change in NOWC | $12,000 | |||
| Before-tax labor cost savings | $57,000 | |||
| WACC | 12.00% | |||
| Tax rate | 40.00% | |||
| Yr. 0 | Yr. 1 | Yr. 2 | Yr. 3 | |
| Depreciation rates | 0.33 | 0.45 | 0.15 | |
| Yr. 0 | Yr. 1 | Yr. 2 | Yr. 3 | |
| Base price | ||||
| Modification costs | ||||
| NOWC | ||||
| Before-tax labor cost savings | $57,000.00 | $57,000.00 | $57,000.00 | |
| Depreciation | ||||
| Operating income | ||||
| Taxes | ||||
| After-tax operating income | ||||
| Add back depreciation | $0.00 | $0.00 | $0.00 | |
| Operating cash flows | ||||
| Termination cash flows | ||||
| Before-tax salvage proceeds | $105,000.00 | |||
| Tax on salvage value | ||||
| NOWC recapture | $12,000.00 | |||
| Project cash flows | ||||
| NPV | ||||
| Project acceptance? | ||||
| Formulas | ||||
| Yr. 0 | Yr. 1 | Yr. 2 | Yr. 3 | |
| Base price | #N/A | |||
| Modification costs | #N/A | |||
| NOWC | #N/A | |||
| Before-tax labor cost savings | $57,000.00 | $57,000.00 | $57,000.00 | |
| Depreciation | #N/A | #N/A | #N/A | |
| Operating income | #N/A | #N/A | #N/A | |
| Taxes | #N/A | #N/A | #N/A | |
| After-tax operating income | #N/A | #N/A | #N/A | |
| Add back depreciation | #N/A | #N/A | #N/A | |
| Operating cash flows | #N/A | #N/A | #N/A | |
| Termination cash flows | ||||
| Before-tax salvage proceeds | $105,000.00 | |||
| Tax on salvage value | #N/A | |||
| NOWC recapture | $12,000.00 | |||
| Project cash flows | #N/A | #N/A | #N/A | #N/A |
| NPV | #N/A | |||
| Project acceptance? | #N/A | |||
What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent
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Bitcoin Cash What You Need To Know About Bch
Authors: Alexander O. M.
1st Edition
1976721229, 978-1976721229
