Transcribed Image Text
You must evaluate the purchase of a proposed spectrometer forthe R&D department. The base price is $80,000, and it wouldcost another $20,000 to modify the equipment for special use by thefirm. The equipment falls into the MACRS 3-year class and would besold after 3 years for $40,000. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. The equipment would require a $9,000increase in net operating working capital (spare parts inventory).The project would have no effect on revenues, but it should savethe firm $38,000 per year in before-tax labor costs. The firm'smarginal 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 tothe nearest cent. Negative amount should be indicated by a minussign.B: What are the project's annual cash flows in Years 1, 2, and3? Round your answers to the nearest cent.C: If the WACC is 11%, should the spectrometer be purchased? (Yes or No)