You have been asked by the president and CEO of your firm to evaluate the proposed acquisition of a new labeling machine for the firm’s pharmacy production lines. The machine’s price is $50,000, and it would cost another $10,000 for transportation and installation. The machine falls into the MACRS three-year depreciation class, and hence the tax depreciation allowances are 0.33, 0.45, and 0.15 in years 1, 2, and 3 respectively. The machine would be sold after three years because the production line is being closed at that time. The best estimate of the machine’s salvage value after three years of use is $20,000. The machine would have no effect on the firm’s sales or revenue, but it is expected to save the firm $20,000 per year in before tax operating costs. The firm’s tax rate is 40 percent and its cost of capital is 10 percent. [show all work please]
a. What is the project’s net investment outlay at Year 0?
b. What is the project’s operating cash flows in years 1, 2, and 3?
c. What are the terminal cash flows at the end of Year 3?
d. If the Project has average risk, is it expected to be profitable?