Question
The Harris Company is evaluating the proposed acquisition of a spectrometer for the firms R&D department. The equipments base price is $140,000, and it would
The Harris Company is evaluating the proposed acquisition of a spectrometer for the firms R&D department. The equipments base price is $140,000, and it would cost another $30,000 to modify it for special use by the firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $60,000. Use of the equipment would require a one-time increase in net operating working capital of $8,000 prior to the start of the project. The spectrometer would have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs, mainly labor. The firms tax rate is 40%.
- What is the net cost of the spectrometer? (i.e., what is the Year 0 net cash flow?)
- What are the net annual operating cash flows in Years 1, 2, and 3?
- What is the additional (non-operating) termination cash flow in Year 3?
- If the firms cost of capital is 12%, should the spectrometer be purchased?
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