Question

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $290,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $132,000. The equipment would require a $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $69,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

Project A			Project B
Probability	Cash Flows		Probability	Cash Flows
0.2	$6,750		0.2	$          0
0.6	7,000		0.6	7,000
0.2	7,250		0.2	17,000

BPC has decided to evaluate the riskier project at 12% and the less-risky project at 9%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.
   $  
2. 
   
3. 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.
   Year 1: $  
   Year 2: $  
   Year 3: $  
4. 
   
5. If the WACC is 10%, should the spectrometer be purchased?
   -Select-YesNo

Answer 1