Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $100,000. A new building will cost $100,000 and will be depreciated on a straight-line basis over 20 years to a salvage value of $0. Actual land salvage at the end of 20 years is expected to be $200,000. Actual building salvage at the end of 20 years is expected to be $150,000.
Equipment for the facility is expected to cost $250,000. Installation costs will be an additional $40,000 and shipping costs will be $10,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage at the end of 20 years is $0. The project will require net working capital of $70,000 initially (year 0), an additional $40,000 at the end of year 1, and an additional $40,000 at the end of year 2.
The project is expected to generate increased EBIT (operating income) for the firm of $100,000 during year 1. Annual EBIT is expected to grow at a rate of 4 percent per year until the project terminates at the end of year 20. The marginal tax rate is 40 percent.
(Hint: See Appendix 9A for information on MACRS depreciation.)
Compute the initial net investment and the annual net cash flow from the project in year 20.