Question
Veridian Dynamics is considering the purchase of a new cloning machine, which will cost $200 million plus an additional $20 million to ship and install.
Veridian Dynamics is considering the purchase of a new cloning machine, which will cost $200 million plus an additional $20 million to ship and install. The new machine will replace the existing machine, which has zero book value and could be sold today for $10 million. The new machine will have a 4 year useful life and will be depreciated to zero using the straight line method. The machine will require $5 million worth of spare parts to be purchased initially and held in inventory for the next 4 years to make sure the machine operates smoothly. It is assumed that these spare parts will be sold at the end of 4 years and the entire $5 million will be recaptured.
The new machine will increase sales by $400 million per year, increase cost of goods sold by $220 million per year, and decrease operating expenses by $20 million per year over the next 4 years. Veridian Dynamics expects to sell the new machine for $40 million at the end of 4 years. Veridian Dynamic's income tax rate is 20% and its cost of capital is 10%.
What is the Annual Free Cash Flow for years 1 through 4?
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