The base price of a spectrometer is $140,000, and shipping and installation costs would add another $30,000. The machine falls into the MACRS 3-year class (33%, 45%, 15% and 7%) and it would be sold after 3 years for $60,000.

The machine would require a $8,000 increase in working capital (increased inventory less increased accounts payable).

There would be no effect on revenues, but pre-tax labor costs would decline by $50,000 per year.

The marginal tax rate is 40%, and the WACC is 12%.

1. What is the initial investment outlay, that is, the Year 0 project cash flow?
2. What are the total cash flows during Years 1, 2, and 3?
3. Should the machine be purchased? Explain your answer.

Answer rating: 100% (QA)

Spectrometer Investment Analysis Year 0 Cash Flow Initial Investment Outlay Base Price 140000 Shipping Installation 30000 Increase in Working Capital ... View the full answer