Question

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 sign.
$

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?
-Select-YesNo

Answer 1

Spectrometer	0	1	2	3	4
MACRS %		33%	45%	15%	7%
Investment	-322,000				22,540
NWC	-14,000			14,000
Salvage				140,000
Savings		24,000	24,000	24,000
Depreciation		-106,260	-144,900	-48,300
EBT		-82,260	-120,900	-24,300
Tax (40%)		32,904	48,360	9,720
Profits		-49,356	-72,540	-14,580
Cash Flows	-336,000	56,904	72,360	140,736

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.