Question
A car manufacturer is considering a three-year project to purchase a new machine press to improve its production efficiency. Six months ago, it contracted with
A car manufacturer is considering a three-year project to purchase a new machine press to improve its production efficiency. Six months ago, it contracted with a consultant to provide a thorough study of whether there was a need for this three-year efficiency project. The report was delivered one month ago and its cost was $25,000. The report suggests that the company should go ahead with the project subject to the manufacturer's financial analysis. Buying a new machine press for $400,000 is estimated to result in $120,000 in annual pretax cost savings. The press falls in the MACRS five-year class and it will have a salvage value at the end of the project of $85,000. At time 0, the press will also require an additional investment in inventory of $9,000. Other current accounts will not be affected. If the companys tax rate is 40% and its WACC is 10%, determine the companys free cash flow for each year (i.e. from time 0 to time 3)? The MACRS schedule is as follows:
Year | 5-year Class |
1 | 20% |
2 | 32% |
3 | 19.2% |
4 | 11.52% |
5 | 11.52% |
6 | 5.76% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started