Your company owns some equipment that has a number of years of useful life left, and for which it has received an offer from a contractor to purchase it, for $1 million. A colleague suggests keeping the equipment for use in implementing a 4-year large scale trial of a new leaching method. The trial would generate $400,000 in each of the 4 years in revenue, and require $130,000 of operating costs. Your colleague expects that the equipment would have a salvage value of $350,000 at the end of the trial. Your colleague shows you the following cash flow diagram, saying "Since we would still be able to sell the equipment,I think including the salvage value makes sense. And, the time value factors I have shown, using the discount rate that we currently use for internal projects, are the two we need"

You can see that there is no cash flow arrow on the diagram that should not be there, and that the time value factors are appropriate. However, there are some arrows missing to fully represent the situation. You also know that your company's effective tax rate is 38%

a)Sketch a duplicate of the cash flow diagram above, and add cash flow arrow(s) and label(s) for any item(s) need to fully and accurately represent this situation

(b)Calculate the present value of all after-tax cash flows associated with your colleague's proposal

(c)Is your colleague's proposal viable?

[P/F, 9, 4] Salvage value [P/A, 9, 4] Revenue Operating cost