Question

1. Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $25 million, and there will be an additional $5 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of ten years and will be depreciated by the straight-line method over its lifetime. The $5 million building modification will be depreciated straight-line over 20 years.  The firm expects that they should be able to sell 2,000,000 gallons per year at a price of $60 per gallon. It will take $36 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the FCF (free cash flows) in year 3 of this project?

1. $27.2 million
2. $16.2 million
3. $23.8 million
4. $29.9 million
5. $45.3 million

Answer 1