NEW PROJECT ANALYSIS
You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $110,000, and it wouldcost another $27,500 to modify the equipment for special use by thefirm. The equipment falls into the MACRS 3-year class and would besold after 3 years for $49,500. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $9,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $21,000 per year in before-tax labor costs. The firm'smarginal 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 tothe nearest cent. Negative amount should be indicated by a minussign.
$ 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 11%, should the spectrometer be purchased?
