Your company is considering a machine that will cost $60,000 at Time 0 and can b

Question

Your company is considering a machine that will cost $60,000 at Time 0 and can be sold after 3 years for $8,000. $10,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3. The facility will produce sales revenues of $70,000/year for 3 years; variable operating costs (excluding depreciation) will be 60 percent of sales. No fixed costs will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress, the machine will have depreciation expenses of $40,000, $15,000, and $5,000 in Years 1, 2, and 3, respectively. The company has a 35% tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 12% required rate of return. Calculate the following values for the project.

A) CF0

B) CF1

C) CF2

D) CF3

E) NPV

F) IRR

Explanation / Answer

Operating costs Year Sales Net Cash Flow NPV Dep 0 CF0 -70000.00 -70000.00 1 70000.00 42000.00 CF1 28000.00 25000.00 40000 2 70000.00 42000.00 CF2 28000.00 22321.43 15000 3 70000.00 42000.00 CF3 46000.00 32741.89 5000 NPV 10063.32 IRR 6.69%

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