Question

DeLuxe Furniture is thinking of buying a wood cutting machine for $150,000 that would save it $40,000 per year in production costs. The savings would be constant over the project's 3-year life. The machine is to be linearly depreciated to zero and will have no resale value after 3 years.

The machine would require an additional $9,000 in net operating working capital. The appropriate cost of capital for this project is 14% and the company's tax rate is 35%.

	Year 0	Year 1	Year 2	Year 3
Cost savings	0	40,000	40,000	40,000
Depreciation	0	50,000	50,000	50,000
EBIT	0	-10,000	-10,000	-10,000
Taxes (35%)
Net income
Depreciation
NOPAT + DEP
CAPEX
ΔNOWC
FCF

Attempt 1/5 for 8 pts.

Part 1

What is the free cash flow in year 0? Choose the right sign.

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 2

What is the free cash flow in year 1?

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 3

What is the free cash flow in year 2?

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 4

What is the free cash flow in year 3?

Hint: add the recovery of net operating working capital.

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 5

What is the NPV of this project?

Answer 1