Capital Budget/Project Analysis

You must evaluate the purchase of a proposed spectrometer for your companys R&D department. The base price is $140,000, and it will cost another $30,000 to modify the equipment for special use by the firm. It has been determined that the equipment can be depreciated over three years at depreciation rates of 33%, 45% and 22% and can be sold at the end of year 3 for $60,000. The project would have no effect on revenues, but it should save the firm $50,000 per year in before-tax labor costs. The marginal federal-plus-state tax rate is 35%.

a.) What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?

b.) What are the projects annual cash flows in Years 1, 2, and 3?

c.) If the WACC is 9%, should the spectrometer be purchased? Explain.