Following questions address a capital budgeting problem and are related, though there are

assumptions made in sequential questions to avoid an initial error causing all subsequent responses to be in error.

Consider the following: A new product is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. The project is expected to have a 4 year life and the equipment will be depreciated on a straight line basis (equal annual amount) to a $4,000 book value.

Producing the new product will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. Stanton's marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $10,000 at the end of 4 years.

Question1: What is the total cost at time zero of accepting this project?

Question 2: What is the depreciation each year over the machine's 4 year life?

Question 3: Regardless of your answer to number 2 above, ASSUME DEPRECIATION = $8,000 per year. What is the project's after tax operating cash flow during years 14 from the machine?

Question 4: Assuming the equipment is sold for the expected $10,000 market salvage value at the end of its 4 year life, compute the after tax salvage value of the equipment.

Note: this question addresses ONLY the aftertax salvage value, i.e., the aftertax cash flow from the sale of the equipment. This question does NOT address any other terminal year cash flows.

Question 5: Regardless of your answer to number 3 & 4 above, ASSUME the project's aftertax operating cash flow during years 14 from the machine = $8,000 and the after tax salvage value = $7,000. What is the TOTAL cash flow expected from this project in the terminal year, including any initial investment amounts assumed to be recovered? Include all terminal year flows as well as the terminal year operating cash flow of 8,000 assumed.