Gemstones ltd is a medium-sized processor of precious stones in an expansion mode. The business has been booming, and it looks set to continue to do so for the foreseeable future. it needs a spectrometer to enable it to differentiate between natural and laboratory-made gems. Gemstones ltd has asked your company to assist in assessing the financial feasibility of the investment. the spectrometer will cost $800,000 and an additional $100,000 will have to spent to modify it for special use. the company expects to sell the equipment in 3 years for $300,000. (for depreciation purposes it falls in the MACRS 3 class which allows full cost recovery in 4 years at the annual rate of (33%, 45%, 15% and 7% respectively). Gemstones Ltd's tax rate is 40%. operating the equipment will require a working capital of $65,000. the new equipment is expected to increase revenues (before tax) by $75,000 per annum. the cost of capital is 10%.

What is the net operating cash flows in years 1, 2 and 3?

What is the terminal value?

In your opinion, should the equipment be purchased?