You have been asked by the president of your company to evaluate the proposed acquisition of a new speedometer for the firm's R&D department. The equipment's basic price is $70,000, and it would cost another $15,000 to modify it for special use for your firm. The spectrometer, which has a MACRS 3-year recovery period, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000 (which will be recaptured at the end of the project). The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%.
(a) What is the net cost of the spectrometer?(that is, what is year0 net cash flow?)
(b) What are the net operating cash flows in year 1,2, and 3?
(c) What is the terminal cash flow of the project?
(d) If the project cost of capital is 10%, would this project be accepted?