Question

# You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price...

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 \$12,000 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 \$30,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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 \$42,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%.

1. 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 cent.
\$

2. 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 cent.
Year 1: \$
Year 2: \$
Year 3: \$

Initial Investment Outlay:

Cost = \$60,000

Modification Cost = \$12,000

Increase in Net working Capital = \$8,000

Initial Outlay = \$80,000

Calculation of annual cash flows:

 Year 1 Year 2 Year 3 Savings in cost 42,000 42,000 42,000 Less: Depreciation 23,760 32,400 10,800 Net Income 18,240 9,600 31,200 Tax @35% 6,384 3,360 10,920 After Tax 11,856 6,240 20,280 Cash Flow = After tax income+ depreciation \$35,616 \$38,640 \$31,080

Additional Cash flow in year 3 = Salvage Value net of tax + Working capital Release

= 30,000 - (30,000-5,040)(35%) +8,000

= \$29,264

Hence, annual cash flow in year 3 = 29,264+31,080 = \$60,344

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