Excel spreadsheets to analyze problem E1. On the spreadsheet please show all inputs and work clearly. E1) The Harris Company is evaluating the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s base price is $140,000, and it would cost another $30,000 to modify it for special use by the firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $60,000. Use of the equipment would require an increase in net working capital of $8,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%. (The MACRS percentages are specified in the formula sheet as well as at the end of the homework.)
a) What is the net cost of the spectrometer? (i.e., what is the Year 0 net cash flow?)
b) What are the net operating cash flows in Years 1, 2, and 3?
c) What is the additional (non-operating) cash flow in Year 3?
d) If the firm’s cost of capital is 12%, should the spectrometer be purchased?