FIN 515 Week 5 Project

(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 firms R&D department. The equipments basic price is $!"!!!" and it
would cost another $#$"!!! to modify it for special use by your firm. The spectrometer" which
falls into the %&'R( )*year class" would be sold after ) years for $)!"!!!. +se of the
equipment would require an increase in net workin, capital -spare parts inventory. of $/"!!!.
The spectrometer would have no effect on revenues" but it is e0pected to save the firm $1$"!!!
per year in before*ta0 operatin, costs" mainly labor. The firms mar,inal federal*plus*state ta0
rate is /!2.
a. 3hat is the net cost of the spectrometer4 -That is" what is the Year*! net cash flow4.
b. 3hat are the net operatin, cash flows in Years #" 1" and )4
c. 3hat is the additional -non*operatin,. cash flow in Year )4
d. 5f the pro6ects cost of capital is #!2" should the spectrometer be purchased4
a. What is the net cost of the spectroeter! ("hat is# what is the $ear-% net cash flow!)
Ans&
7et cost of the spectrometer 8 price 9 modifications 9 chan,e in 73' 8 !!!!9#$!!!9/!!! 8
$ '(%%%
). What are the net operatin* cash flows in $ears 1# +# an, -!
Ans&
The depreciation e0pense 2 for Year # 8 !.))
The depreciation e0pense 2 for Year 1 8 !./$
The depreciation e0pense 2 for Year ) 8 !.#$
Depreciation shield for Year # 8 $ :$!!! ; /! 2 ; !.)) 8 $ ##"11!
Depreciation shield for Year 1 8 $ :$!!! ; /! 2 ; !./$ 8 $ #$")!!
Depreciation shield for Year ) 8 $ :$!!! ; /! 2 ; !.#$ 8 $ $"#!!
The after ta0 savin,s 8 1$!!!-#*T. 8 1$!!!;!.<8 $#$!!!
Year # Year 1 Year)
&fter ta0 savin,s #$!!! #$!!! #$!!!
Depreciation (hield ##11! #$)!! $#!!
7et 'ash =low +.++% -%-%% +%1%%
c. What is the a,,itional (non-operatin*) cash flow in $ear -!
Ans&
>ook value of the spectrometer 8 $ :$!!! ; -# ? -!.))9!./$9!.#$.. 8 $ $@$!
Aain on salva,e value 8 $ )!!!! ? $ $@$! 8 $ 1/!$!
A,,itional (non-operatin*) cash flow in $ear -
/ (alva,e value ? Ta0 on (alva,e Balue 9 Return on 73'
8 )!!!! ? 1/!$! ; !./ 9 /!!! 8 $ +0# -'%.
,. If the project1s cost of capital is 1%2# sho3l, the spectroeter )e p3rchase,!
Ans&
Year 'ash =low
! *:@!!!
# 1<11!
1 )!)!!
) ///:!
WACC = r = 10%
0 1 2 3
Spectrometer *:@!!! 1<11! )!)!! ///:!
NPV
Spectrometer -$6,703.83
We *et the project1s NP4 as - 5 .7%-.'-# an, so# the project sho3l, not )e accepte, as a
res3lt or spectroeter sho3l, not )e p3rchase,.