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Problem 3 (Cash Flows). Artificial Limb, Inc. is looking at a new production system with an installed cost of $6 million. This cost will be
Problem 3 (Cash Flows). Artificial Limb, Inc. is looking at a new production system with an installed cost of $6 million. This cost will be depreciated straight-line to zero over the project's three-year life. At the end of year 3, the new system can be sold for $1 million. Annual revenues from the machine, net of maintenance costs, are $4 million per year (pre-tax). The system require an initial investment in net working capital of $100,000, which must be maintained for the three years. The tax rate is 40% and the discount rate is 10%. There are four types of cash flows on this project: 1) Per-year operating cash flows (after-tax, including depreciation tax shield) 2) a) The initial (time 0) investment cost 2) b) The system's after-tax salvage value (at time 3) 3) Changes to working capital All cash flows need to be after-tax. Part a. What are the per-year after-tax operating cash flows (including the depreciation tax shield)? (Hint: This is the OCF Equation (1).)
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