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%, and 15%. The equipment would require a $10,000 increase in net operating 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?
