You are the head of finance department in XYZ Company. You are considering adding a new machine to your production facility. The new machine’s base price is $10,900.00, and it would cost another $1,970.00 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after three years for $2,150.00. The machine would require an increase in net working capital (inventory) of $680.00. The new machine would not change revenues, but it is expected to save the firm $33,085.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 32.00%.
1. If the project's cost of capital is 14.20%, what is the NPV of the project?
2. What is the initial cash outlay?
3. What are the free cash flow for year 1?
4. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)?
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