Question
Machine A can be purchased for $80,000, including shipping and installation. The new machine has an economic life estimated to be four years. Straight line
Machine A can be purchased for $80,000, including shipping and installation. The new machine has an economic life estimated to be four years. Straight line depreciation will be used. During the projects four-year life, the new machine will generate revenue of $70,000 per year. Machine As variable costs are $25,000 per year and its fixed costs are $5,000 per year. Machine A will require an increase in net working capital of $2,000, to be incurred at the beginning of the project. This working capital will be recovered in the terminal year of the project. At the end of its useful life, Machine A is estimated to have a market (salvage) value of $2,500. The firms marginal tax rate is 40 percent, and the appropriate required rate of return is 10 percent. Please answer the following questions: If Corporation purchases Machine A, what is the amount of the initial investment outlay for this new project at Year 0? What are the net incremental free cash flows in Years 1 through 4?
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