Reference no: EM132490202

Part 1: You must evaluate the purchase of a proposed spectrometer for the R810 department. The purchase prioe of the spectrometer including modi?cations is $190,000. and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $30,000. The equipment would require a $9,000 increase in net operating working capital {spare parts inventory). The project would have no effect on revenues, but it should save the ?rm $40,000 per year in before-tax labor costs. The ?rm's marginal federal-plus-state tax rate is 25%.

Question a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash ?ow? Enter your answer as a positive value. Round your answer to the nearest dollar. $

Question b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Part 2: Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project:

Sales revenues $15 million

Operating costs 13.5 million

Interest expense 1 million

• The company has a 25% tax rate, and its WACC is 10%.
• Write out your answers completely. For example, 13 million should be entered as 13,000,000.

Question a. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.

Question b. If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.