Question
9. Your firm is considering investing in a project, the details of which are given below: A new machine costing $12,000 is required (at t=0).
9. Your firm is considering investing in a project, the details of which are given below:
A new machine costing $12,000 is required (at t=0).
The project also requires an initial net working capital of $1,000 (at t=0), which will be recovered at the end of the project life (year 3)
The new machine is being depreciated to zero for tax purposes using the 6-year straight-line method. The new machine can be sold at the end of the project (end of year 3) for $6,800.
The project will generate earnings before interest, and taxes (EBIT) of $4,800 a year over the next 3 years.
The firms tax rate is 40%.
The cost of capital is 15%.
(a) What are the free cash flows for this project?
(b) What is the NPV of the project?
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