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DeLuxe Furniture is thinking of buying a wood cutting machine for $150,000 that would save it...

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Finance

DeLuxe Furniture is thinking of buying a wood cutting machinefor $150,000 that would save it $40,000 per year in productioncosts. The savings would be constant over the project's 3-yearlife. The machine is to be linearly depreciated to zero and willhave no resale value after 3 years.

The machine would require an additional $9,000 in net operatingworking capital. The appropriate cost of capital for this projectis 14% and the company's tax rate is 35%.

Year 0Year 1Year 2Year 3
Cost savings040,00040,00040,000
Depreciation050,00050,00050,000
EBIT0-10,000-10,000-10,000
Taxes (35%)
Net income
Depreciation
NOPAT + DEP
CAPEX
?NOWC
FCF

Attempt 1/5 for 8 pts.

Part 1

What is the free cash flow in year 0? Choose the right sign.

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 2

What is the free cash flow in year 1?

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 3

What is the free cash flow in year 2?

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 4

What is the free cash flow in year 3?

Hint: add the recovery of net operating working capital.

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 5

What is the NPV of this project?

Answer & Explanation Solved by verified expert
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