A company is considering investing in a new machine that has an estimated life of three years. The cost of the machine is $50,000 and it will be depreciated using the three year MACRS schedule (33%, 45%, 15%, 7%). The machine will be used to produce electric outlets that are expected to generate sales of $280,000 each year over the next three years. The cost of goods sold is expected to be 65% over the next three years. As a result of taking on the project the company expects to invest $9,000 in working capital at the same time as purchasing the machine. The initial working capital investment is expected to be recovered at the end of three years. Further, the company expects that it can sell the machine at the end of the project for $15,000 (pre-tax). The firm tax bracket is 34% and its cost of capital is 10%.
- What is the expected project cash flow in year 2?
- What is the NPV of this project?