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Should the spectrometer be purchased

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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 firms R&D department. The equipments 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?

Reference no: EM131101188

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