FI515_W5_Project_BrianLin

# FI515_W5_Project_BrianLin - =Price of Spectrometer...

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Brian Lin D01278742 Week 5 Project Week 5 Project Problem 11-7 You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department. The equipment’s basic price is \$70,000, and it would cost another \$15,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for \$30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of \$4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm \$25,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%. a) What is the net cost of the spectrometer? (That is, what is the Year-0 net cash flow?) Net Cost of Spectrometer

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Unformatted text preview: =Price of Spectrometer + Modification Use + Increase in NWC =\$70,000 + \$15,000 + \$4,000 =\$89,000 b) What are the net operating cash flows in Years 1, 2, and 3? Year 1 Year 2 Year 3 After-Tax Savings \$15,000 \$15,000 \$15,000 Depreciation Tax Savings \$11,220 \$15,300 \$5,100 Net Op. Cash Flows \$26,220 \$30,300 \$20,100 c) What is the additional (non-operating) cash flow in Year 3? Salvage Value \$30,000 Less: Tax on Salvage Value \$9,620 (\$30,000-\$5,950)*40% Add: Increase in Net Working Capital \$4,000 Terminal Cash Flow (Add’l Non Op Cash Flow) \$24,380 d) If the project’s cost of capital is 10%, should the spectrometer be purchased? If WACC = 10% Cash Flow Present Value Year 0 (89,000) (89,000) Year 1 26,220 23,836.36 Year 2 30,300 25,041.32 Year 3 20,100 + 24380 33,418.38 NPV (6,703.83) Do not purchase....
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## This note was uploaded on 10/13/2011 for the course MAFM FI516 taught by Professor Anthonycriniti during the Spring '10 term at Keller Graduate School of Management.

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FI515_W5_Project_BrianLin - =Price of Spectrometer...

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