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 base price is $10,300.00, and it would cost another $2,370.00 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 $1,650.00. The machine would require an increase in net working capital (inventory) of $770.00. The new machine would not change revenues, but it is expected to save the firm $24,185.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 32.00%.
If the project's cost of capital is 12.10%, NPV =30,614.46
a. What is the initial cash outlay?
b. What are the free cash flow for year 1?
c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital â also called terminal value)?