1. What is the net cost of the spectrometer-Year 0 net cash flow?

Basic Price-$70,000
Modification-$15,000
Increase Working Capital-$4,000
Total-$89,000=(89,000)-Outflow

2. Net operating cash flows Years 1, 2, 3.
Total amount of depreciation-$85,000

Year 1= 33.33%*85,000=$28,330.50
Year 2=44.45%*85,000=$37,782.50
Year 3=14.81%*85,000=$12,588.50
Total years 1, 2, 3=$78,701.50 Book value=$6,298.50

Tax rate=40%
Savings=$25,000

Year1=$25,000-$28,330.50=-$3,330.50
Year2=$25,000-$37,782.50=-$12,782.50
Year3=$25,000-$12,588.50=$12,411.50

Year1 Tax Credit=40%*-$3,330.50=$1,300
Year2 Tax Credit=40%*-$12,782.50=$5,113
Year3 Tax Credit=40%*$12,411.50=-$4,964.60

Year1 Operating Cash Flow=$25,000+$1,300=$26,300
Year2 Operating Cash Flow=$25,000+$5,113=$30,113
Year3 Operating Cash Flow=$25,000+(-$4,964.60)=$20,035

3. Additional non-operating cash flow
Sale price after 3 years=$30,000
Book value=$6,298.50
Gain=$30,000-$6,298.50=$23,701.50
Tax=40%*$23,701.50=$9,480.60
After tax Cash Flow=$30,000-$9480.60=$20,519.40
Working Capital=$4,000
Non-Operating Cash Flow=$20,519.40+$4,000=$24,519.40

4. If cost of capital is 10%, should spectrometer be purchased?
Discount rate = %10
Year 0= -89,000*1=-89,000
Year 1= 26,300*.909091=23,909
Year 2=30,113*.826446=24,887
Year 3= 44,514*.751315=33,474
Total=-6,730=Negative NPV-do not purchase spectrometer.