DeLuxe Furniture is thinking of buying a wood cutting machinefor $150,000 that would save it $40,000 per year in productioncosts. The savings would be constant over the project's 3-yearlife. The machine is to be linearly depreciated to zero and willhave no resale value after 3 years.
The machine would require an additional $9,000 in net operatingworking capital. The appropriate cost of capital for this projectis 14% and the company's tax rate is 35%.
| Year 0 | Year 1 | Year 2 | Year 3 |
| Cost savings | 0 | 40,000 | 40,000 | 40,000 |
| Depreciation | 0 | 50,000 | 50,000 | 50,000 |
| EBIT | 0 | -10,000 | -10,000 | -10,000 |
| Taxes (35%) | | | | |
| Net income | | | | |
| Depreciation | | | | |
| NOPAT + DEP | | | | |
| CAPEX | | | | |
| ?NOWC | | | | |
| FCF | | | | |
Attempt 1/5 for 8 pts.
Part 1
What is the free cash flow in year 0? Choose the right sign.
Try againSee solution (-2 pts.)Move on
Attempt 1/5 for 8 pts.
Part 2
What is the free cash flow in year 1?
Try againSee solution (-2 pts.)Move on
Attempt 1/5 for 8 pts.
Part 3
What is the free cash flow in year 2?
Try againSee solution (-2 pts.)Move on
Attempt 1/5 for 8 pts.
Part 4
What is the free cash flow in year 3?
Hint: add the recovery of net operating working capital.
Try againSee solution (-2 pts.)Move on
Attempt 1/5 for 8 pts.
Part 5
What is the NPV of this project?
