You must evaluate the purchase of a spectrometer for the R&D department. The base price is $11,000, and it would cost another $100 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 $1,650. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $800 increase in net operating working capital. The project would have no effect on revenues, but it should save the firm $6,000 per year in before-tax labor costs. The firm’s marginal federal-plus-state tax rate is 40%.
1) What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?
2) What is the project's Free Cash Flow in Year 1, Year 2, Year 3?
3) If the WACC is 10%, what is the project's NPV?