Landcruisers Plus(LP) has operated an online retail store selling off-road truck parts. As the name impies, the firm specializes in parts for the venerable Toyota FJ40, which is known for known throughout the world.To make the adapter kits, the firm would need to invest in a vareity of machine tools costing a total of $700,000. LP's management plans to borrow $400,000 from its bank and pay 8 percent interest. The remaining funds will have to be supplied by LP's owners. The firm estimates that the selling price for the part would be $1,300 each and it can sell 1,000 units/year. The units would cost $1,000 each in cash expenses to produce( this does not include depreciation expense of $70,000 per year or interest expense of $32,000). After all the expenses , the firm expects earnings before interest and taxes of $198,000. The firm pays taxes equal to 30 percent, which results in net income of $138,600 per year over the 10-year expected life of the equipment.
a. What is the annua free cash flow LP should expect to receive from the investment in year 1, assuming that it does not require any other investments in either capital investment or working capital and the equipment is depreciated over a 10-year life to a zero salvage and book value?
b. If the firm's required rate of return for its inestments is 10 percent and the investment has a 10 - year expected life, Compute using the financial calculator the anticipated NPV of the investment?