Question: You have been asked by the president of your company

You have been asked by the president of your company to evaluate the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s 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. 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 firm’s marginal tax rate is 40 percent.
a. What is the initial investment outlay associated with this project?
b. What are the supplemental operating cash flows in Years 1, 2, and 3?
c. What is the terminal cash flow in Year 3?
d. If the firm’s required rate of return is 12 percent, should the spectrometer be purchased?

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  • CreatedNovember 24, 2014
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