You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $270,000, and it would cost another $67,500 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 $135,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $79,000 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. x Open spreadsheet a. 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. b. 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 $ c. If the WACC is 12%, should the spectrometer be purchased? Base price Additional modification costs Before-tax salvage proceeds Change in NOWC Before-tax labor cost savings 8 WACC Tax rate $270,000 S67,500 S135,000 $7,000 $79.000 12.00% 40.00% Depreciation rates 0.33 0.45 0.15 O NOUAWNO Yr. O Yr 1 Yr. 3 16 Base price Modification costs 18 NOWC 20 $79.000.00 $79,000.00 $79.000.00 Before-tax labor cost savings Depreciation Operating income Taxes After-tax operating income Add back depreciation Operating cash flows $0.00 $0.00 26 $135,000.00 Termination cash flows Before-tax salvage proceeds Tax on salvage value $1 NOWC recapture Project cash flows $7.000.00 o own NPV Project acceptance? Formulas Yr. 1 Yr. 2 Yr. 3 Base price 10 Modification costs NOWC ON Yr. 0 #N/A #N/A #N/A Formulas Yr. 1 Yr. 2 Yr. 3 Base price Modification costs NOWC Yr. O #N/A #N/A #N/A $79,000.00 Before-tax labor cost savings Depreciation Operating income Taxes After-tax operating income Add back depreciation Operating cash flows $79.000.00 #N/A #N/A #N/A #N/A #N/A #N/A $79,000.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A $135,000.00 Termination cash flows Before-tax salvage proceeds Tax on salvage value NOWC recapture Project cash flows #N/A $7,000.00 #N/A #NA #N/A NPV Project acceptance? #N/A #N/A
