1. CAPITAL BUDGETING -- THE UFRO COMPANY. The UFRO Company is considering the replacement of an existing spectrometer with
a new spectrometer, faster and with expanded capacity. If the new
spectrometer is purchased, the existing (old) spectrometer will be sold for
$30,000 immediately. The existing spectrometer was purchased three (3)
years ago for $300,000. It is being depreciated under the 3-year MACRS
schedule. The salvage value at the end of its six-year life will be $80,000.
The new spectrometer will be purchased for $650,000. If the new
spectrometer is purchased, accounts receivable increase immediately by
$25,000; accruals will decrease immediately by $40,000; and accounts
payable will decrease immediately by $30,000. The UFRO Company has
a 30% corporate tax rate. Shipping costs for the new spectrometer, paid
by the manufacturer, will be $20,000; and installation costs for the new
spectrometer, paid by UFRO, will be $35,000.
If the new spectrometer is purchased, sales in year 1 will be $560,000,
sales in year 2 will be $580,000, and sales in year 3 will be $520,000.
Without the new spectrometer, sales in each year will be $300,000.
Operating expenses will continue to be 50% of sales. With the new
spectrometer accounts receivable will increase by $5,000 at T=1 and
$10,000 at T=2. The new computer will be depreciated using the 3-year
MACRS schedule [yr.1: 33%;yr. 2: 45%; yr 3: 15%; and yr. 4:7%). The
new spectrometer will be sold, however, after three (3) years for $95,000
The UFRO Company has a cost of capital of 12%.
Calculate the NPV, IRR, MIRR and Payback Period.