1. Forsyth of Canada is a manufacturer of mens dress shirts. Each mens dress shirt requires 19 separate pieces, which are cut by spreading many plies of fabric onto a long table, then a mechanical knife is guided by hand over an outline of the parts. Forsyth is considering the purchase of a laser cutter to make this process more efficient. Because the new machine is more precise than cutting by hand, the machine would result in annual savings of $375,000. Additionally, the use of the laser cutter would reduce the amount of overtime needed to keep up with the plant, resulting a savings of $57,000 per year.

The laser cutter and equipment cost $700,000. Delivery and set up for the machine cost $50,000 and training is another $40,000. The equipment does need software to operating it, but this can only be licensed for $45,000 annually, which is considered an operating expense. The equipment has a useful life of 10 years, but has a MACRS class life of 7 years. The equipment has no material impact on your balance sheet.

1. Calculate the net investment cash outflows for this asset: (3 points)

2. If Forsyth were to sell the laser cutter after 3 years for $400,000, what would be the tax implications and the terminal value? The companys tax rate is 30% (remember, they are in Canada). The MACRS 7-year class schedule is as follows: 14%, 24%, 18%, 13%, 9%, 9%, 8%, 5%. (4 points)

3. Calculate the operating cash flows for the projects life. (Be sure to detail all of the components of your calculations and set up your table with years on the top row going from left to right) (8 points)

4. Place all cash flows on a timeline. (Dont forget to indicate sign.) (2 points).

5. What criterion should Forsyth use to decide whether to undertake this project? Should they undertake it if the companys cost of capital is 15%? (3 points)