You are evaluating the proposed purchase of some new equipment by your company. The price of the machinery is $240,000, and it would cost another $60,000 to adapt it to your firms purposes. The machinery would be sold after 6 years for $50,000 and depreciation will be based on the straight-line method.

Use of the equipment would require an increase in net working capital of $15,000. The machinery is expected to save the firm $58,000 per year in operating costs. The corporate income tax rate is 34%.

1. What is the initial investment outlay associated with the project?
2. What is the terminal cash flow in Year 6?
3. If the projects required rate of return is 14%, should the equipment be purchased?

4. Explain how the company could increase the NPV of the project by using debt finance?