Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $230,000, and it would cost another $57,500 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 $115,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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 $36,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

- What is the initial investment outlay for the spectrometer,
that is, what is the Year 0 project cash flow? Round your answer to
the nearest cent. Negative amount should be indicated by a minus
sign.

$ -
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 $

- 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 base price is $230,000, and it would
cost another $57,500 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 $80,500. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require an $9,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $110,000, and it would
cost another $22,000 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 $27,500. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require a $11,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $90,000, and it would
cost another $13,500 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 $40,500. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require a $9,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $200,000, and it would
cost another $40,000 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 $100,000. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require a $5,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $240,000, and it would
cost another $60,000 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 $120,000. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require a $10,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $180,000, and it would
cost another $27,000 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 $81,000. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require a $5,000
increase in net operating working capital (spare parts inventory).
The project would have...

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 $42,000 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 a $14,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $170,000, and it would
cost another $34,000 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 $59,500. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require a $8,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $60,000, and it would
cost another $9,000 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 $27,000. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The equipment would require an $11,000
increase in net operating working capital (spare parts inventory).
The project would have...

You must evaluate the purchase of a proposed spectrometer for
the R&D department. The base price is $60,000, and it would
cost another $15,000 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 $27,000. 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...

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