Your boss, the president of Parts R Us (headquartered in Hot Springs Arkansas), has asked you to evaluate the proposed replacement of the firm's chicken part homogenator. The new machine would cost $400,000 including freight and installation, and would qualify for depreciation allowances under 3-year MACRS (0.33, 0.45, 0.15, .07). The purchase of this machine would increase before tax revenues by $150,000 per year, but would also increase operating costs by $80,000 per year. A $30,000 increase in chicken parts inventory would be required if the new machine is purchased. Finally, it would have an economic life of 4 years, after which there would be a $25,000 charge for disposing of the, by then, toxic equipment.

The old machine was purchased 2 years ago for $350,000, but could continue to be used for another 4 years, at the end of which time it would have a salvage value of $35,000. Depreciation for this machine is computed by 3-year MACRS. You have learned from Jim Bob, the local dealer in parts processing equipment, that the old homogenator could be sold right away for $150,000.

The firm's marginal tax rate is 34 percent, and the project's cost of capital is 10 percent.

a) What is the initial outlay for this project? b) What is the incremental after-tax cash flow for year 1?