You have been asked by the president of your company to evaluate the pro- posed 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 your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after three years for $60,000. (See Table 13A2 in the textbook at the end of this chapter for MACRS recovery allowance percentages.) Use of the equipment would require an increase in net working capital (spare parts inventory) of $8,000. 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 (excluding depreciation), mainly labor. The firms marginal tax rate is 40 percent.

A. What is the initial investment outlay associated with this project?

Purchase/Base Price	$140,000
Modification Charges	$30,000
Increase Net Working Capital/ Investement	$8,000
Total Investment:	$178,000

Initial Investement Associated with Project: $178,000

B. What are the supplemental operating cash flows in Years 1, 2, and 3?

Recovery Allowance Percentages:

Year-1: 33%

Year-2: 45%

Year-3: 15%

Depreciation:

	Year 1	Year 2	Year 3
Depreciation Base	$170,000	$170,000	$170,000
Percentage	33%	45%	15%
Depreciation Cost/AMount	$56,100	$76,500	$25,500

C. What is the terminal cash flow in Year 3?

D. If the firms required rate of return is 12 percent, should the spectrometer be purchased?

ONLY ANSWER C AND D