You have been asked by Dr. Hauser, the President of the CSI Crime Lab to evaluate the proposed acquisition of a spectrometer for the crime lab. The equipment’s base price is $120,000, and it would
cost another $20,000 to modify it for special use by the lab. The spectrometer, which falls into the MACRS 3-year class, would be sold after three years for $57,000. Use of the spectrometer would
require an increase in net working capital (spare parts inventory) of $8,000. The spectrometer would have no effect on the lab’s revenues, but it is expected to save the lab $60,000 per year in
before-tax operating costs, mainly labor. The crime lab’s marginal tax rate is 30 percent.
For this problem, use the following MACRS table for the recovery allowance:

Property Class
Year 3-Year
1 33%
2 45%
3 15%
4 7%
a) Prepare the Pro forma project net working capital and capital spending requirements.

b) Prepare the Pro forma project income statement.

c) Prepare the Pro forma project cash flows

d) If the project’s required return is 10%, should the spectrometer be purchased?

e) What happens if the pre-tax labor savings are only $45,000 per year?

f) Prepare a 1-page memo to the President of CSI explaining your recommendation. Note that Dr. Hauser is very impatient therefore you will need to have an answer for him on the first page of
the report or else he will stop reading. He will also want to review the following tables.