1. What is a sunk cost? Should it be included in the cash flow calculations? Why?

2. What is depreciation expense? Should it be included in the cash flow calculations? Why?

3. Mahya Corporation is considering the purchase of a high-speed lathe that has an invoice price of $300,000. The cost to ship the lathe to Mahya's factory is $60,000, and the existing facilities will require modifications that are expected to cost $70,000. The machine will be depreciated on a straight-line basis over its useful life of 10 years, assuming no salvage value. Mahya Corporation is planning on paying for the lathe using a line of credit at the bank that has an interest rate of 6 percent per year. The lathe is expected to increase production and sales. Sales are expected to increase by $150,000 per year.

$20,000 is needed for the additional networking capital. Expenses to operate the lathe are $25,000 per year. Mahya's marginal tax rate is 40%.

a. Calculate the initial outlay required to fund this project.

b. Calculate the incremental after-tax cash flow in year one of the project.