Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $140,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $42,000. 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 $79,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

- What is the initial investment
outlay for the spectrometer, that is, what is the Year 0 project
cash flow? Enter your answer as a positive value. Round your answer
to the nearest dollar.

$ - 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: $ - If the WACC is 11%, should the spectrometer be purchased?

Answer #1

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $290,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $108,000. The equipment would require a
$13,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $37,000 per year in before-tax labor...

eBook
You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $70,000, and the equipment will be fully
depreciated at the time of purchase. The equipment would be sold
after 3 years for $22,000. 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 $28,000 per year in before-tax...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $180,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $80,000. The equipment would require a
$15,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $49,000 per year in before-tax labor...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $200,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $94,000. The equipment would require a
$9,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $21,000 per year in before-tax labor...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $180,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $35,000. The equipment would require a
$14,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $62,000 per year in before-tax labor...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $70,000, and the equipment will be fully
depreciated at the time of purchase. The equipment would be sold
after 3 years for $26,000. The equipment would require a $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 $60,000 per year in before-tax labor...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $290,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $132,000. The equipment would require a
$15,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $69,000 per year in before-tax labor...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $240,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $73,000. The equipment would require an
$8,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $35,000 per year in before-tax labor...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $300,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $67,000. The equipment would require an
$8,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $63,000 per year in before-tax labor...

eBook
You must evaluate the purchase of a proposed spectrometer for
the R&D department. The purchase price of the spectrometer
including modifications is $110,000, and the equipment will be
fully depreciated at the time of purchase. The equipment would be
sold after 3 years for $37,000. The equipment would require a
$15,000 increase in net operating working capital (spare parts
inventory). The project would have no effect on revenues, but it
should save the firm $65,000 per year in before-tax...

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