1. The Lathe

You are considering the purchase of a new lathe to expand production of a hot product line. The lathe costs $280. It will have a life of four years. You will depreciate the lathe to zero book value using straight-line depreciation over four years. At the end of four years, you will sell the machine for $50. The new lathe will generate cash sales of $230 per year, and operating costs will run $120 per year. The firm will need to carry additional inventory of $30, accounts receivable of $30, and cash balances of $10. There is no material impact on accounts payable. The corporate tax rate is 40%. Assume the additional working capital requirements are incurred at the start of the project (t = 0) and are recovered in Year 4. The discount rate is 8%.

Assume all cash flows last for four years.

1. Use a table similar to the following to estimate the total cash flows from the project.

Description	0	1	2	3	4

2. Assume the cash flows from (A) are the following:

Description	0	1	2	3	4
Total cash flow	375.00	100.00	100.00	100.00	200.00

What are the NPV and IRR for the project? (Show calculations to receive full credit.) Should you invest in the project?