Question

Check for the question with "Cash flows estimation and capital budgeting:" in this test and answer the following questions (show your work in details here):

a. What is the initial cash outlay? (4 pts.)
b. What is the free cash flow for year 1? (4 pts)
c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)? (4 pt)

(please show your work in details and highlight your answers)

Cash flows estimation and capital budgeting:
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 $10,100.00, and it would cost another $3,280.00 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 $780.00. The new machine would not change revenues, but it is expected to save the firm $29,185.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 39.00%.

If the project's cost of capital is 16.75%, what is the NPV of the project?

Round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.

Answer 1

a)	INITIAL CASH OUTLAY:
	Base price of the new machine	10100
	Installation cost	3280
	Total cost of the machine	13380
	Increase in NWC	780
	Total initial outlay	14160
b)	FREE CASH FLOWS:	0	1	2	3
	Annual savings in optg expenses		29185	29185	29185
	Depreciation		4460	5947	1982
	Incremental NOI		24725	23238	27203
	Tax at 39%		9643	9063	10609
	NOPAT		15083	14175	16594
	Add: Depreciation		4460	5947	1982
	OCF		19542	20122	18576
	Capital spending	13380
	Increase in NWC	780
	Additional Year 3 cash flow				2478
	[See calculation below]
	FCF	-14160	19542	20122	21054
	PVIF at 16.75% [PVIF = 1/1.1675^n]	1	0.85653	0.73365	0.62839
	PV at 16.75%	-14160	16738	14763	13230
	NPV	30571
c)	Additional Year 3 cash flow:		780
	Return of NWC
	Salvage value of equipment	2150
	Book value	991
	Gain on sale	1159
	Tax at 39%	452
	After tax cash flow from sale = 2150-452 =		1698
	Additional Year 3 cash flow		2478