You must evaluate the purchase of a spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 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 $60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $50,000 per year in before-tax labor costs. The firm%u2019s marginal federal-plus-state tax rate is 40%. a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? b. What are the project%u2019s annual cash flows in Years 1, 2, and 3? c. If the WACC is 12%, should the spectrometer be purchased? Explain. a. Cost of investment at t = 0: Base price (140,000) Modification (30,000) Increase in NWC (8,000) Cash outlay for new machine (178,000) b. Annual cash flows: Year 1 Year 2 Year 3 After-tax savings Depreciation tax savings Salvage value Tax on SV Return of NWC Project cash flows 0 0 0 c. Year Cash Flow PV 0 1 2 3 NPV = Accept o
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