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XOM inc. has completed the analysis of new machine and estimated the following cash flows. At the end of year 4, firm will complete the

XOM inc. has completed the analysis of new machine and estimated the following cash flows. At the end of year 4, firm will complete the project and liquidate the equipment. The equipment originally cost $5M, and production and sales will require an initial $2 million investment in net operating working capital. Modification of new equipment will cost additional $1 million. At the end of year 4, 75% of the machines original cost is depreciated. The salvage value of the equipment is $3M and tax rate is 40%.

Year

0

1

2

3

4

Cash

flows

Initial investment

Outlay

Operating

Cash flow 1

Operating

Cash flow 2

Operating

Cash flow 3

Operating

Cash flow 4

CFs

CF0

C01

C02

C03

C04

-$? million

$2 million

$3 million

$3 million

$4 million

What is the NPV of the project (assume cost of capital is 12%)?

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