Edward's Manufactured Homes is considering replacing some machines. Edwards purchased the current machinery 2 years ago for $320. The company is considering replacing this machinery today with newer machines that utilize the latest in technology. The new machines will cost $400, plus an additional $15 for installation. We will shut down production in 4 years. The old machines can be sold for $140 to a foreign firm for use in its production facility in South America. Both machines are classified as 5-year property for MACRS. The old machines will have expected salvage value of $0 in four years.

Annual sales, due to the new machines increased production, will increase from $1500 to $1520. The new machines are more efficient and should lower net annual variable operating costs by $35. Annual Fixed costs will remain the same at $700. Over the past two years, Edwards has spent $13 testing the various available machines. In 4 years, we estimate that the value of the new machines to be $125. We currently have $75 in working capital invested in the project, which is not expected to change if we buy the new machine. The firms tax rate is 35%. The cost of capital is 12%.

a. (3 points) What are the initial cash flows in year 0?

b. (4 points) What are the operating cash flows in year 2?

c. (3 points) What are the terminal cash flows in year 4?

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