a. What is the Year-0 net cash flow (initial investment)?

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (ie the after-tax salvage value)?

d. If the project's cost of capital is 11%, should the machine be purchased? Why or why not?

PLEASE SHOW EXCEL FORMULAS TOO

Louie's Lumber Mill - New Machine

Initial Investment

Base Price

Install Cost

Total Initial Investment

a)

Year 0

Year 1

Year 2

Year 3

Pre-Tax Savings

- Depr

EBIT

- Tax

NOPAT

+ Depr

OCF

b)

Sales Price

Book Value Year 4

Gain (Loss) on Sale

Taxes @ 40%

After-Tax Proceeds

Return of NWC

Terminal Cash Flow

c)

Cash Flows

Year 0

Year 1

Year 2

Year 3

NPV @ 11%

d)

Explain:

Louie is looking at adding a new machine to his lumber mi The machine's price is $380,000 and it would cost another $10,500 to install it. The machine falls into the MACRS3-year class, and it would be sold after 3 years for $110,000. Adding the machine would not require any change in networking capital. The machine would not increase revenues, but it is expected to save Louie $120,000 per year in before-tax operating costs, mainly through a reduction in labor. Louie's marginal tax rate is 40% Complete the template below to answer the following questions a. What is the Year-0 net cash flow (initial investment)? b. What are the net operating cash flows in Years1, 2, and 3? c. What is the additional Year-3 cash flow (ie the after-tax salvage value d. If the project's cost of capital is 11%, should the machine be purchased? Whyor why not? Louie's Lumber Mill New Machine Initial Investment Base Price Install Cost a) Total Initial Investment Year 0 Year 1 Year 2 Year 3 Pre- lax Savings Depr EBIT Tax NOPAT Depr OCF Sales Price Book Value Year 4 Gain (Loss) on Sale Taxes 40% After-Tax Proceeds Return of NWC Terminal Cash Flow Year 0 Cash Flows Year 1 Year 2 Year 3 NPV 11% Explain