You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $280,000, and it would cost another $42,000 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 $140,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $24,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
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. Negative amount should be indicated by a minus
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 $
If the WACC is 10%, should the spectrometer be purchased?
Depreciation = MACRS % x Investment
Cash Flows = Investment + NWC + Profits + Depreciation + After-tax Salvage Value
The spectrometer should not be purchased as we do not even recover the initial investment from the project. Hence, No.
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