Use the following information for the next THREE questions.

Suppose we are considering automating some part of an existing production process. The necessary equipment costs $70,000 to buy and install. The automation will save $22,000 per year (before taxes) by reducing labor and material costs. For simplicity, assume that the equipment has a five-year life and is depreciated to zero on a straight-line basis over that period. It will actually be worth $25,000 in five years. Should we automate? The tax rate is 21%.

Calculate the CFFA in Yr 1.

Hint: Depreciation per yr = 70,000/5 = 14,000

EBIT = 22,000 14,000 = 8,000

Taxes = 8000 x .21 = 1680

OCF = EBIT + Depr Taxes