Problem
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $80,000, and it would cost another $20,000 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 $40,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $73,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
Open spreadsheet
• What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
$ fill in the blank 2
• What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.
In Year 1 $ fill in the blank 3
In Year 2 $ fill in the blank 4
In Year 3 $ fill in the blank 5
• If the WACC is 13%, should the spectrometer be purchased?
The response should include a reference list. One-inch margins, Using Times New Roman 12 pnt font, double-space and APA style of writing and citations.
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