The Ironworks Pegs Corporation, facing a market that isrequiring more and more of the square-type pegs as opposed to theround one, is considering a project to start producing square pegsto meet the expected growth in the market demand. In order toproduce the new pegs, the company needs to replace an existing oldmachine that produces round pegs with a new one. The new machinecosts $150,000 (including shipping and handling). The old machinehas been fully depreciated and the new one would be depreciated ona straight-line basis over its estimated useful life of 15 years.If the decision is made to go ahead with the project the oldmachine will be sold for $10,000. Annual revenues are expected tobe $132,000; cost of goods sold $41,000; operating costs (excludingdepreciation) $35,000. The existing operating profit (EBIT) fromthe old machine is $5,000 per year (which is assumed to continuefor the following ten years if the new project does not get thegreen light). The company estimates the actual productive life ofthe project at 10 years, after which the new machine would be soldfor a salvage value of $80,000. The initial net working capitalneeded for the expanded operations is estimated at $25,000. The NWCwill rise to $35,000 by the end of year one, then to $50,000 by theend of year two. No additional changes in NWC are expected foryears three through eight. By the end of year 9, the NWC would bereduced to $30,000 (no theft, spoilage, or obsolescence is assumedto have occurred by the end of year ten). The way the company madeall these estimates is by conducting a technical and economicfeasibility study that cost $35,000. It also cost $15,000 tomarket-test the new widgets. The company’s marginal tax rate is40%. The required rate of return on this investment is 15%.

1. Calculate the net initial investment needed for the new pegmachine.

1. Calculate the expected after-tax salvage value of the newmachine when the time comes for it to be sold.

1. Estimate all the relevant annual free cash flows and show themon a timeline using the Excel spreadsheet.

1. Use the six capital budgeting decision criteria to make adecision as to whether to go ahead with the project. Use the Excelfinance functions. Assume a 6-year acceptable payback period.