$12\mathrm{.}2.$ Landcruisers Plus $($LP$)$ has operated an online retail store selling off$-$road truck parts. As the name implies, the firm specializes in parts for the venerable Toyota FJ$40$ that is known throughout the world for its durability and off$-$road prowess. The fact that Toyota stopped building and exporting the FJ $40$ to the U$.$S$.$ market in $1982$ meant that FJ$40$ owners depended more and more on re$-$manufactured parts to keep their beloved off$-$road vehicles running. More and more FJ$40$ owners are replacing the original inline six$-$cylinder engines with a modern American$-$built engine. The engine replacement requires mating the new engine with the Toyota drive train.

LP$$s owners had been offering engine adaptor kits for some time but have recently decided to begin building their own units. To make the adaptor kits the firm would need to invest in a variety of machine tools coting a total of $ $700,000.$

LP$$s management estimates that they will be able to borrow $ $400,000$ from its bank and pay $8$ percent interest. The remaining funds would have to be supplied by LP owners. The firm estimates that they will be able to sell $1,000$ units a year for $ $1,300$ each. The units would cost $ $1,000$ each in cash expenses to produce $($this does not include depreciation expense of $ $70,000$ per year or interest expense of $ $32,000).$ After all expenses, the firm expects earnings before interest and taxes of $ $198,000.$ The firm pays taxes equal to $30$ percent, which results in net income of $ $138,600$ per year over the $10-$year expected life of the equipment.

a$)$What is the annual free cash flow LP should expect to receive from the investment in Year $1,$ assuming it does not require any other investments in either capital equipment or working capital and that the equipment is depreciated over a $10-$year life to a zero salvage and book value? How should the financing cost associated with the $ $400,000$ loan be incorporated into the analysis of cash flow?