You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $120,000, 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 $36,000. 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 $52,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

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. Negative amount should be indicated by a minus sign.

   $

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?

   _____Yes or No?

B16 A B D E 1 $120,000 $30,000 $36,000 $13,000 $52,000 12.00% 40.00% 2 3 Base price 4 Additional modification costs 5 Before-tax salvage proceeds 6 Change in NOWC 7 Before-tax labor cost savings 8 WACC 9 Tax rate 10 11 12 Depreciation rates 13 14 15 16 Base price 17 Modification costs 18 NOWC Yr. O Yr. 1 Yr. 2 Yr. 3 0.33 0.45 0.15 Yr. O Yr. 1 Yr. 2 Yr. 3 A B D E $52,000.00 $52,000.00 $52,000.00 $0.00 $0.00 $0.00 19 20 Before-tax labor cost savings 21 Depreciation 22 Operating income 23 Taxes 24 After-tax operating income 25 Add back depreciation 26 Operating cash flows 27 28 Termination cash flows 29 Before-tax salvage proceeds 30 Tax on salvage value 31 NOWC recapture 32 Project cash flows 33 34 NPV 35 Project acceptance? 36 $36,000.00 $13,000.00 A B D E Yr. 1 Yr. 2 Yr. 3 Yr. O #N/A #N/A #N/A $52,000.00 Formulas 38 39 Base price 70 Modification costs 71 NOWC 72 73 Before-tax labor cost savings 74 Depreciation 75 Operating income 76 Taxes 77 After-tax operating income 78 Add back depreciation 79 Operating cash flows 50 51 Termination cash flows 2 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture $52,000.00 #N/A #N/A #N/A #N/A #N/A #N/A $52,000.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A $36,000.00 #N/A $13,000.00 $36,000.00 #N/A $13,000.00 #N/A #N/A #N/A #N/A 51 Termination cash flows 52 Before-tax salvage proceeds 53 Tax on salvage value 54 NOWC recapture 55 Project cash flows 56 57 NPV #N/A 58 Project acceptance? #N/A 59 50 51 52