Question
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $160,000, and the
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $160,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $55,000. The equipment would require an $11,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $54,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.
a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.
$ ------?
b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
Year 1: $ ----?
Year 2: $ ----?
Year 3: $ ----?
c. If the WACC is 11%, should the spectrometer be purchased?
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