Question
Premier Steel, Inc. is considering the purchase of a new machine for $110,000 that has a useful life of 3 years. The firm's cost of
Premier Steel, Inc. is considering the purchase of a new machine for $110,000 that has a useful life of 3 years. The firm's cost of capital is 11% and the tax rate is 40%. This machine will be sold for its salvage value of $20,000 at the end of 3-years. The machine will require an investment of $2,500 in spare parts inventory upon installation. The machine will cost $7,500 to ship and $4,500 to install and modify it. Sales are as follows: year 1 = $90,000; year 2 = $97,500; year 3 = $105,000. Operating expenses are year 1 = $25,000; year 2 = $27,000; year 3 = $29,000. The investment in working capital will be liquidated at termination of the project at the end of year 3. What is the free cash flow for year 3?Year1Year2Year3Year4MACRS Rates33%45%15%7%
A)$54,820B)$52,320C)$49,820D)$55,420
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