If the Bowie plant is sold, those operations will need to shift to the main Largo facility. The CEO is proposing to acquire robotics-based sorting and distribution equipment to facilitate more cost-effective operations (and be able to handle the increased workload) at Largo.

The CFO has asked you to evaluate the cash flow projections associated with the equipment purchase proposal and recommend whether the purchase should go forward. Table 2 shows projections of the cash inflows and outflows that would occur during the first eight years using the new equipment.

Keep the following in mind:

Depreciation. The equipment will be depreciated using the straight-line method over eight years. The projected salvage value is $0.Taxes. The CFO estimates that company operations as a whole will be profitable on an ongoing basis. As a result, any accounting loss on this specific project will provide a tax benefit in the year of the loss.

			Table 1 - Data
Cost of the new manfactoring equipment (at year=0)			$	191.1	million
Corporate income tax rate - Federal				26.0%
Corporate income tax rate - State of Maryland				8.0%
Discount rate for the project				6.0%

			Table 2 - After-tax Cash Flow Timeline
	(all figures in $ millions)
Year	Projected Cash Inflows from Operations	Projected Cash Outflows from Operations	Depreciation Expense	Projected Taxable Income	Projected Federal Income Taxes	Projected State Income Taxes		Projected After-tax Cash Flows
0
1	850.0	840.0
2	900.0	810.0
3	990.0	870.0
4	1,005.0	900.0
5	1,200.0	1,100.0
6	1,300.0	1,150.0
7	1,350.0	1,300.0
8	1,320.0	1,300.0
			Table 3 - Example - Computing Projected After-tax Cash Flows
	For Year 4	(all figures in $ millions)
	Projected Cash Inflows from Operations		1005.0			Projected Cash Inflows from Operations			1005.0
minus	Projected Cash Outflows from Operations		(900.0)		minus	Projected Cash Outflows from Operations			(900.0)
minus	Depreciation Expense		(23.9)		minus	Projected Federal Income Taxes			(21.1)
equals	Projected Taxable Income		81.1		equals	Projected State Income Taxes			(6.5)
						Projected After-tax Cash Flows			77.4
	Projected Taxable Income		81.1
times	Corporate income tax rate - Federal		26.0%
equals	Projected Federal Income Taxes		21.1
	Projected Taxable Income		81.1
times	Corporate income tax rate - State		8.0%
equals	Projected State Income Taxes		6.5

1. Complete Table 2. Compute the projected after tax cash flows for each of years 1-8.

2. Compute the total present value (PV) of the projected after tax cash flows for years 1-8.

3. Compute the net present value (NPV) of the projected after tax cash flows for years 0-8.

4. Compute the internal rate of return (IRR) of the project.

5. The CFO believes that it is possible that the next few years will bring a very low interest rate environment.