Question
Lowell Inc. is thinking about replacing an old computer with a new one. The new one will cost $1,000,000 and will have a life of
Lowell Inc. is thinking about replacing an old computer with a new one. The new one will cost $1,000,000 and will have a life of FOUR years. The new computer qualifies as 5-year MACRS property.
Years | 1 | 2 | 3 | 4 |
Depreciation rate | 20% | 32% | 19% | 12% |
It will probably be worth about $360,000 after FOUR years. The old computer is being depreciated at a rate of $120,000 per year. It will be completely written off in FOUR years, at that time it will have zero resale value. We can sell it now for $360,000 after taxes. The new machine will save us $200,000 per year in operating costs. The tax rate (federal plus state) is 25 percent and WACC is 8 percent. What is the TOTAL FREE CASH FLOW FOR YEAR 4?
Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value
462,500 | ||
422,500 | ||
442,500 | ||
482,500 |
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