You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $280,000, and it would cost another $56,000 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 $140,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $41,000 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. X Open spreadsheet a. What is the initial investment outlay for the spectrometer, that is, what is the Year O project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ -341,000 b. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2$ in Year 3 $ At c. If the WACC is 11%, should the spectrometer be purchased? No f A B D m F Base price $280,000 Additional modification costs $56,000 Before-tax salvage proceeds $140,000 5 Change in NOWC $5,000 7 Before-tax labor cost savings $41,000 8 WACC 11.00% 9 Tax rate 40.00% 10 11 Yt. 0 12 Depreciation rates 13 14 15 Yr. O 16 Base price =C44) 17 Modification costs 18 NOWC 19 Yr. 1 Yr. 2 Yr. 3 0.33 0.45 0.15 Yr. 1 Yr 2 Yr. 3 + 1 + 1 AAAM RRA Sheet1 Yr. 1 Yr 2 Yr. 3 Yr. O #N/A #NA #N/A $41,000.00 36 37 Formulas 38 39 Base price 40 Modification costs 41 NOWC 42 43 Before-tax labor cost savings 44 Depreciation 45 Operating income 46 Taxes 47 After-tax operating income 48 Add back depreciation 49 Operating cash flows 50 51 Termination cash flows 52 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture $41,000.00 #N/A #NA #NA #NA WNIA #INA $41,000.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A WNA #N/A #N/A $140,000.00 #N/A $5,000.00 WIR L. Sheet1 Help Improve Office 10 itti ryhook Catistics $140,000.00 SU 51 Termination cash flows 52 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture 55 Project cash flows #N/A $5,000.00 #N/A #N/A #N/A #N/A time 56 eges of UNIA #N/A expen tax n each 57 NPV 58 Project acceptance? 59 60 61 62 63 64 65 66 67 68 $41,000.00 $41,000.00 $41,000.00 $0.00 $0.00 $0.00 Before-tax labor cost savings 1 Depreciation - Operating income 3 Taxes 4 After-tax operating income 5 Add back depreciation 6 Operating cash flows 27 28 Termination cash flows 29 Before-tax salvage proceeds 30 Tax on salvage value 31 NOWC recapture 32 Project cash flows 33 34 NPV 35 Project acceptance? 36 37 Formulas $140,000.00 $5,000.00 You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $280,000, and it would cost another $56,000 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 $140,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $41,000 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. X Open spreadsheet a. What is the initial investment outlay for the spectrometer, that is, what is the Year O project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ -341,000 b. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2$ in Year 3 $ At c. If the WACC is 11%, should the spectrometer be purchased? No f A B D m F Base price $280,000 Additional modification costs $56,000 Before-tax salvage proceeds $140,000 5 Change in NOWC $5,000 7 Before-tax labor cost savings $41,000 8 WACC 11.00% 9 Tax rate 40.00% 10 11 Yt. 0 12 Depreciation rates 13 14 15 Yr. O 16 Base price =C44) 17 Modification costs 18 NOWC 19 Yr. 1 Yr. 2 Yr. 3 0.33 0.45 0.15 Yr. 1 Yr 2 Yr. 3 + 1 + 1 AAAM RRA Sheet1 Yr. 1 Yr 2 Yr. 3 Yr. O #N/A #NA #N/A $41,000.00 36 37 Formulas 38 39 Base price 40 Modification costs 41 NOWC 42 43 Before-tax labor cost savings 44 Depreciation 45 Operating income 46 Taxes 47 After-tax operating income 48 Add back depreciation 49 Operating cash flows 50 51 Termination cash flows 52 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture $41,000.00 #N/A #NA #NA #NA WNIA #INA $41,000.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A WNA #N/A #N/A $140,000.00 #N/A $5,000.00 WIR L. Sheet1 Help Improve Office 10 itti ryhook Catistics $140,000.00 SU 51 Termination cash flows 52 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture 55 Project cash flows #N/A $5,000.00 #N/A #N/A #N/A #N/A time 56 eges of UNIA #N/A expen tax n each 57 NPV 58 Project acceptance? 59 60 61 62 63 64 65 66 67 68 $41,000.00 $41,000.00 $41,000.00 $0.00 $0.00 $0.00 Before-tax labor cost savings 1 Depreciation - Operating income 3 Taxes 4 After-tax operating income 5 Add back depreciation 6 Operating cash flows 27 28 Termination cash flows 29 Before-tax salvage proceeds 30 Tax on salvage value 31 NOWC recapture 32 Project cash flows 33 34 NPV 35 Project acceptance? 36 37 Formulas $140,000.00 $5,000.00
