You must evaluate the purchase of a spectrometer for the R&D department. The

You must evaluate the purchase of a spectrometer for the R&D department. The

base price is $140000 and it would cost another $30000 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 $60000. The applicable depreciation rates are 33%

45% 15% and 7% as discussed in Appendix 12A. The equipment would require an

$8000 increase in net operating working capital (spare parts inventory). The project

would have no effect on revenues but it should save the firm

$50000 per year in before-tax labor costs. The firm%u2019s 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?

b. What are the project%u2019s annual cash flows in Years 1 2 and 3?

c. If the WACC is 12% should the spectrometer be purchased? Explain.

a.

Cost of investment at t = 0:

Base price (140000)

Modification (30000)

Increase in NWC (8000)

Cash outlay for new machine (178000)

b.

Annual cash flows:

Year 1 Year 2 Year 3

After-tax savings

Depreciation tax savings

Salvage value

Tax on SV

Return of NWC

Project cash flows 0 0 0

c.

Year Cash Flow PV

0

1

2

3

NPV =

Accept o