Due to high demand for wood, San Lorenzo Lumber is considering buying a new timber cutting machine to add to its existing stock. The machine will cost $320,000 to purchase and $20,000 for shipping and installation. Last year, the firm cleared an unused area in its timber mill to make space for the machine, at a cost of $8,000. The new cutting machine will allow the company to sell an additional 140,000 pieces of wood per year, at a price of $2 per piece. Variable costs, including timber, electricity and labor, are expected to add up to 80% of sales. To make best use of the new machine, the company will need to increase its inventory of timber logs by $25,000. Since the firm uses trade credit when purchasing raw timber, accounts payable will increase by $12,000. The cutting machine is expected to last 4 years and will then be sold for $35,000. It falls into the 3-year MACRS class, with depreciation rates as follows: Year 1 2 3 4 Depreciation rate 33% 45% 15% 7% The firm has a marginal tax rate (federal and state) of 34%.

Part 2

What is the free cash flow in year 1?

Part 3

What is the free cash flow in year 2?

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Part 4

What is the free cash flow in year 3?