FIN 515 W5 Project

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 equipments basic price is 70000 and it would cost another 15000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3 year class, would be sold after 3years for 30000. Use the equipment would require an increase in net working capital (spare parts inventory) of 4000. The spectrometer would have no effect on revenues but it is expected to save the firm 25000 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 the year 0 net cash flow?

B. what are the net operating cash flows in year 1, 2, 3

C. what is the additional nonoperating cash flow in year 3?

D. if the projects cost of capital is 10 %, should the spectrometer be purchased?
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