Activity: New project analysis You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $200,000, and it would cost another $40,000 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 $50,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $60,000 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. X HHHI Open spreadsheet a. What is the initial investment outlay for the spectrometer, that is, what is the Year O project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ b. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2 $ In Year 3$ c. If the WACC is 11%, should the spectrometer be purchased? No v Check My Work Reset Problem G10 B D E $200,000 $40,000 $50,000 $14,000 $60,000 11.00% 40.00% Yr. O Yr. 1 Yr. 2 Yr. 3 0.33 0.45 0.15 Yr. O Yr. 1 Yr. 2 Yr. 3 3 Base price 4 Additional modification costs 5 Before-tax salvage proceeds 6 Change in NOWC 7 Before-tax labor cost savings 8 WACC 9 Tax rate 10 11 12 Depreciation rates 13 14 15 16 Base price 17 Modification costs 18 NOWC 19 20 Before-tax labor cost savings 21 Depreciation 22 Operating income 23 Taxes 24 After-tax operating income 25 Add back depreciation 26 Operating cash flows 27 28 Termination cash flows 29 Before-tax salvage proceeds 30 Tax on salvage value 31 NOWC recapture 32 Project cash flows 33 $60,000.00 $60,000.00 $60,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $50,000.00 $14,000.00 $0.00 $0.00 $0.00 Sheet1 Calculation Mode: Automatic Workbook Statistics G10 fx E Yr. 3 $60,000.00 B D 34 NPV 35 Project acceptance? 36 37 Formulas 38 Yr. O Yr. 1 Yr. 2 39 Base price #N/A 40 Modification costs #N/A 41 NOWC #N/A 42 43 Before-tax labor cost savings $60,000.00 $60,000.00 44 Depreciation #NA #N/A 45 Operating income #N/A #N/A 46 Taxes #N/A #N/A 47 After-tax operating income #N/A #N/A 48 Add back depreciation #NA #N/A 49 Operating cash flows =C24+C25 =D24+D25 =E24+E25 50 51 Termination cash flows 52 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture 55 Project cash flows =SUM(B16:B18) =C26 =D26 56 57 NPV #N/A 58 Project acceptance? #N/A 59 60 61 62 63 64 #NA #N/A #N/A #N/A #N/A $50,000.00 #N/A $14,000.00 #N/A