You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40 percent.

a. What is the net cost of the spectrometer? (That is, what is the Year 0 net cash flow?)

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional (non-operating) cash flow in Year 3?

d. If the project’s cost of capital is 10 percent, should the spectrometer be purchased?