Kirksville Inc. is considering the purchase of a new production machine for $1,400,000. The machine has a 5-year life. Although the purchase of this machine will not produce any increase in sales revenues, it will result in a before-tax reduction of labor costs by $500,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $40,000 after tax. In addition, it would cost $150,000 after tax to install this machine properly. Also, its purchase would necessitate $300,000 in initial net working capital for the project, and an additional investment in net working capital of $60,000 every year thereafter. All net working capital will be recovered when the project ends. The machine is expected to be sold for $200,000 as it is scrapped at the end of the project. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 20 percent marginal tax rate, and a required rate of return of 5 percent.

a. (6 points) What is the initial outlay associated with this project?

b. (4 points) What are the operating cash flows associated with this project?

c. (6 points) What is the terminal cash flow in year 5?

d. (4 points) Should this machine be purchased?