You have been asked by the president of your company to evaluatethe proposed acquisition of a new spectrometer for the firm’sR&D department. The equipment’s basic price is $70,000, and itwould cost another $15,000 to modify it for special use by yourfirm. The spectrometer, which falls into the MACRS 3-years class,would be sold after 3 years for $30,000. Use of the equipment wouldrequire an increase in net working capital (spare parts inventory)of $4,000. The spectrometer would have no effect on revenues, butit is expected to save the firm $25,000 per year in before-taxoperating costs, mainly labor. The firm’s marginalfederal-plus-state tax rate in 40 per cent.
a. What is the net cost of the spectrometer? (that is, what is theYear 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 thespectrometer be purchased?Â
ScholarMatic: Explanation & Answer
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