Cash Flow Estimation Problems : please do not solve using excel
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 $4000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating cost, mainly labor.
The firm’s marginal federal–plus-state tax rate is 40%. If the project’s cost of capital is 10%, should the spectrometer be purchased?