LEE Corporation intends to purchase equipment for $1,000,000. The equipment has a 5 year useful life and will be depreciated on a straight-line basis to a salvage value of $250,000. LEE?s marginal tax rate is 30%. Use of the equipment is expected to change the company?s reported EBIT by $300,000 in year one, $350,000 in year two, $350,000 in year three, $200,000 in year four, and $150,000 in year five. Net working capital associated with the new machine is equal to 10% of EBIT.
1) The free cash flow in year 1 is:
A) $395,000
B) $305,000
C) $330,000
D) $390,000
2) The free cash flow in year 2 is:
A) $395,000
B) $305,000
C) $330,000
D) $390,000
3) The free cash flow in year 3 is:
A) $395,000
B) $305,000
C) $330,000
D) $390,000
3) The free cash flow in year 4 is:
A) $395,000
B) $305,000
C) $330,000
D) $390,000
4) The terminal cash flow in year 5 is:
A) $255,000
B) $260,000
C) $510,000
D) $495,000
5). If the risk-adjusted discount rate for this project is 12%, calculate the project?s net present value.
A) $355,672
B) $369,922
C) $372,634
D) $381,782