You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $130,000, and it would cost another $19,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $45,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $72,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%. If the WACC is 13%, should the spectrometer be purchased?
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $130,000, and it would cost another $19,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $45,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $72,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%.
If the WACC is 13%, should the spectrometer be purchased?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
