Lattice Semiconductor is thinking of buying a new machine for $160,000 that would save it $40,000 per year in production costs. The savings would be constant over the project's 3-year life. The machine falls into the 3-year MACRS class (see table for depreciation amounts) and can be sold for $80,000 after three years.
The machine would require an additional $6,000 in net working capital. The company uses a weighted average cost of capital of 12% and has a tax rate of 35%.
Year 1 Year 2 Year 3
Cost savings 40,000 40,000 40,000
Depreciation 52,800 72,000 24,000
EBIT -12,800 -32,000 16,000
Taxes (35%)
Net income
Depreciation
EBIT (1-t) + Dep.
CapEx
ΔNWC
Free Cash Flow (FCF)
1. What is the free cash flow in year 1?
2. What is the free cash flow in year 2?
3. What is the machine's after-tax salvage value at the end of year 3?
4. What is the free cash flow in year 3?
5. What is the NPV of this project?