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Problem: You should compute a proposed spectrometer for R&D department. The base price is $270,000, and it would cost another $40,500 to modify the equipment for special use by firm. The equipment falls in the MACRS 3-year class and would be sold after 3 years for $108,000. The appropriate depreciation rates are 33%, 45%, 15%, and 7%. The equipment would need a $7,000 raise in net operating working capital (spare parts inventory). The project would have no effect on revenues however it must save the firm $69,000 each year in before-tax labour costs. The firm's marginal federal-plus-state tax rate is 40%.

problem1. What is the initial investment outlay for spectrometer, that is, what is Year 0 project cash flow?

problem2. What are the project's yearly cash flows in Years 1, 2, and 3?

In Year 1 $
In Year 2 $
In Year 3 $

problem3. If the WACC is 11%, must the spectrometer be bought?

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M94038

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