Question
DeLuxe Furniture is thinking of buying a wood cutting machine for $160,000 that would save it $40,000 per year in production costs. The savings would
DeLuxe Furniture is thinking of buying a wood cutting machine for $160,000 that would save it $40,000 per year in production costs. The savings would be constant over the project's 3-year life. The machine is to be linearly depreciated to zero and will have no resale value after 3 years.
The machine would require an additional $6,000 in net operating working capital. The appropriate cost of capital for this project is 10% and the company's tax rate is 35%.
Year 0 | Year 1 | Year 2 | Year 3 | |
Cost savings | 0 | 40,000 | 40,000 | 40,000 |
Depreciation | 0 | 53,333 | 53,333 | 53,333 |
EBIT | 0 | -13,333 | -13,333 | -13,333 |
Taxes (35%) | ||||
Net income | ||||
Depreciation | ||||
NOPAT + DEP | ||||
CAPEX | ||||
NOWC | ||||
FCF |
Part 1: What is the free cash flow in year 0? Choose the right sign.
Part 2: What is the free cash flow in year 1?
Part 3: What is the free cash flow in year 2?
Part 4: What is the free cash flow in year 3?
Hint: add the recovery of net operating working capital.
Part 5: What is the NPV of this project?
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