Capital-Budgeting-projects-free-cash-flows -v2

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					              Sub: Finance                                                                   Topic: Capital budgeting


              Calculations of the projects free cash flows.

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              A firm is considering the purchase of a new machine to replace the one that is currently in use.
              It has gathered the following information on each of these machines:
              Current Machine: The machine currently in use was originally purchased 2 years ago for
              $40,000. It is being depreciated under the modified accelerated cost recovery system (MACRS)
              using a 5-year recovery period, and has 3 years of usable life remaining. The current machine
              can be sold today to net $42,000 after removal and cleanup costs. However, in 3 years (at the
              end of Year 3) the market value of the old machine will be zero. The firm’s earnings before
              depreciation, interest and taxes (EBDIT) are expected to be $70,000 for each of the next 3 years
              if the old machine is kept in use.
              New Machine: The new machine can be purchased at a price of $140,000 and requires $10,000
              to install. It has a 3-year usable life and will be depreciated under the MACRS using a 3-year
              recovery period. If the new machine is acquired, the investment in accounts receivable will be
              expected to rise by $10,000, the inventory investment will increase by $25,000, and accounts
              payable will increase by $15,000. At the end of 3 years, the new machine could be sold to net
              $35,000 before taxes. Earnings before depreciation, interest and taxes (EBDIT) are expected to
              be as follows with the new machine:
                                                  Year             EBDIT
                                                  1                $120,000
Description: Calculations of the projects free cash flows.
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