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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%.
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a. What is the net cost of the spectrometer? (That is, what is the Year-0 net cash flow?)
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b. What are the net operating cash flows in Years 1, 2, and 3? |
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c. What is the additional (nonoperating) cash flow in Year 3?
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d. If the project’s cost of capital is 10%, should the spectrometer be purchased? |
