Question
Question 3 (8 marks) Company X is considering an investment opportunity that involves purchasing a machine. The machine costs $125,000 and will have a useful
Question 3 (8 marks) Company X is considering an investment opportunity that involves purchasing a machine. The machine costs $125,000 and will have a useful life of three years. Using it will generate sales revenue of $120,000 each year and the cost of goods sold will be 50% of sales. Assume the machine will be depreciated on a straight-line basis to a salvage value of $5,000 at the end of Year 3. At the end of Year 3 the machine will be sold for $15,000. The project requires an initial investment (at Year 0) into net working capital equal to 10% of predicted first-year sales revenue; and the net working capital will be recovered when the project ends. The company has just spent $2,000 of consulting fees on evaluating this investment opportunity. The cost of capital is 10% and the tax rate is 30%. Required:
a) Estimate the free cash flows of the investment opportunity by year. (5 marks)
b) What is the NPV of this investment opportunity? (3 marks)
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