Question

Intro

The local franchise of Jiffy Lube is thinking of buying a new lift for $40,000 that would make it easier to access the oil filter in customers' cars and save labor. The savings would increase over the project's 3-year life, in line with the projected growth of the business. The machine is to be linearly depreciated to zero and will have no resale value after 3 years.

The appropriate cost of capital for this project is 12%. The company has a tax rate of 21%.

Year 1 Year 2 Year 3

Cost savings 70,000 77,000 92,400

Depreciation 13,333 13,333 13,333

EBIT 56,667 63,667 79,067

Taxes (21%)

Net income

Depreciation

FCF

Attempt 1/1 for 10 pts.

Part 1

What is the free cash flow in year 1?

Submit

Attempt 1/1 for 10 pts.

Part 2

What is the free cash flow in year 2?

Submit

Attempt 1/1 for 10 pts.

Part 3

What is the free cash flow in year 3?

Submit

Attempt 1/1 for 10 pts.

Part 4

What is the NPV of this project?

Answer 1

Note - Total Cash Flow is also known as Free Cash Flow

Free Cash Flow = Net Income + Depreciation + Cash flow from the sale of asset (if any)

NPV = PV of Cash Inflows - PV of Cash Outflows
NPV = 156,550.54 - 40,000
NPV = $116,550.54