Problem 12-8

New project analysis

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $170,000, and it would cost another $42,500 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 $68,000. 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 $30,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

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.

= -225,500

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 11%, should the spectrometer be purchased?

yes or no?