Check for the question with "Cash flows estimation andcapital budgeting:" in this test and answer the followingquestions (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-taxsalvage and the return of working capital – also called terminalvalue)? (4 pt)
(please show your work in details and highlight youranswers)
Cash flows estimation and capital budgeting:
You are the head of finance department in XYZ Company. You areconsidering adding a new machine to your production facility. Thenew 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-yearclass (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 workingcapital (inventory) of $780.00. The new machine would not changerevenues, but it is expected to save the firm $29,185.00 per yearin before-tax operating costs, mainly labor. XYZ's marginal taxrate is 39.00%.
If the project's cost of capital is 16.75%, what is the NPV of theproject?
Round your answer to two decimal places. For example, if youranswer is $345.667 round as 345.67 and if your answer is .05718 or5.718% round as 5.72.
