Week 5 project f1515 - d. If the projects cost of capital...

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Week 5 project Problem 11- 7 "New-Project Analysis" 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?) b. What are the net operating cash flows in Years 1, 2, and 3? (26220,30300,20100) c. What is the additional (nonoperating) cash flow in Year 3? 24380
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Unformatted text preview: d. If the projects cost of capital is 10%, should the spectrometer be purchased? NPV=-6704 no purchase Known Information: Spectrometer Base Price: $70,000 Modifications: $15000 Salvage after 3 years: $30000 Net work Capital Increase: $4000 Cost savings before Taxes: $25000/year Marginal Fed and State tax rate: 40% a. What is the net cost of the spectrometer? Spectrometer Base Price: | - $70,000 | Modifications: | - $15,000 | Net work Capital Increase: | - $4,000 | Total Net cash flow: | -$89,000 | b. What are the net operating cash flows in Years 1, 2, and 3? After Tax = (25,000 * (1-0.40) = $15,000/year MARC 3-year Deprecation Rate = 33%, 45%, 15%, 7% c. What is the additional (non operating) cash flow in Year 3? d. If the projects cost of capital is 10%, should the spectrometer be purchased? Since the NPV is negative, reject the project...
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This note was uploaded on 01/31/2012 for the course FINANCIAL f1515 taught by Professor Karylfriedman during the Spring '11 term at Keller Graduate School of Management.

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Week 5 project f1515 - d. If the projects cost of capital...

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