(a) Anderson Inc. needs to replace their rapid prototyping machine. They can purchase an injection molding based machine at a cost of $700,000. This machine will reduce before tax operating expenses by $100,000 per year, This machine will be depreciated to a value of zero on a straight line basis for seven years and will need to be replaced after seven years and will be scrapped as worthless. Alternatively they can buy a layering based machine at a cost of $350,000. This machine will reduce before tax operating expenses by $55,000 per year. This machine will be depreciated to a value of zero on a straight line basis over four years and will need to be replaced after four years and will be scrapped as worthless. If Anderson has a 20% tax rate and a 12% cost of capital which machine do they prefer?

(b)

Ears Inc. has spent $100,000 developing a prototype of a new type of wireless earbuds. They plan on selling the earbuds for $80 a set and expect to sell 10,000 sets for the next 4 years after which they will need to replace them with a new design. The Cost of Goods Sold for each set is $50. Ears combines all the fixed costs of their production facility an allocates these costs based on Sales. This project has received an allocation of $150,000 of these costs. This project will generate $60,000 in new fixed costs. The will need intial NOWC of $80,000 to start the project the project will not need any NOWC when completed in 4 years. The project will require $600,000 of new Equipment which will be depreciated on a 4 year straight line basis. At the end of the project this equipment will be worthless. The OCC = 10% and the Tax Rate is 20%.

1. (10 points) Calculate the Start Up Costs and the NOPAT and Free Cash Flow generated in each of the four years of the project.

2. (5 Points) Calculate the NPV of the project.

3. (5 Points) Calculate the dollar value of annual earbud sales required to reach Economic Break Even.

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