The Richmond Kayak Company (RKC) uses plasma cutter in the production to fabricate metal parts of the kayaks and canoes. RKC is currently using a cutter which has been used since four years ago. The current cutter has an $80,000 book value and is being depreciated $20,000 per year over the next four years. If this cutter were to be sold today, RKC estimates it would bring in an amount equal to the book value of the equipment.

RKC is considering the purchase of a new automated plasma cutter that would cost $400,000, with an expected useful life of four years. All equipment of RKC are depreciated using the straight-line method. The fully automated plasma cutter is expected to result in labour savings of $100,000 per year. An additional working capital of $30,000 is required at the beginning of the investment. The working capital will be recovered after the project is finished. At the end of the 4-year period, the cutter could be sold at $40,000 at the end of its expected useful life.

Assume the corporate tax rate is 30% and the firm's cost of capital is 15%.

Required:

a) What is the projects total Free Cash Flow in year 0? Explain. [2 marks]

b) What is the projects total Free Cash Flow every year from Year 1 to Year 3? Explain. [2 marks]

c) What is the projects total Free Cash Flows in Year 4? Explain [2 marks]

d) What assumptions do NPV and IRR make about the reinvestment of a projects cash flows over its life? Which assumption is more realistic? Explain your answer. [2 marks]