You must evaluate a proposed spectrometer for the R&D; department. The base pric

Question

You must evaluate a proposed spectrometer for the R&D; department. The base price is $230, 000, and it would cost another $46,000 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 $103,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $10, 000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $38,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. $ b. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. in Year 1 $ in Year 2 $ in Year 3 $ c. If the WACC is 10%, should the spectrometer be purchased?

Explanation / Answer

what is the net cost of the spectrometer, thatt is what is the Year 0 project cash flow?

b. what are the project's annual net cash flows in Year 1,2,and 3?

if the WACC is 10% should the spectrometer be purchased?  

spectrometer should not be purchased as the NPV is negative

Base Price 230000 Modification Cost 46000 Net Working Capital 10000 Initial Investment 286000

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