Problem 12-7

New project analysis

You must evaluate a proposed spectrometer for the R&D department. The base price is $200,000, 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 $50,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $78,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. 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. $

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 $

in Year 2 $

in Year 3 $

3. If the WACC is 12%, should the spectrometer be purchased?