A company wants to update their assets by buying some new machinery and selling some old equipment. The new machinery will cost $100,000 and will be depreciated using 3-year MACRS (33%, 45%, 15%, 7%). At the end of the third year, the machinery is expected to be sold for $10,000.

The old equipment was bought three years ago for $60,000 and was being depreciated over four years using straight-line depreciation. It can be sold today for $10,000. If they do not buy the new machinery and replace the old equipment, then the old equipment is expected to be held for another three years at which point it will be worthless.

Regardless of whether they buy the new machinery, Sales will be $500,000 for the next three years, but COGS will fall from 70% of Sales to 60% of Sales if they buy the new machinery. The tax rate is 40%. Balance Sheet Effects |-----------Depreciation Expenses------------|

Today Year 1 Year 2 Year 3 End

1. Buy New Assets

2. Sell Old Assets

Income Statement Effects Year 1 Year 2 Year 3

Net Sales

-Net COGS

-Net Depreciation

= Net OEBT

- Net Taxes

= Net OEAT

+ Net Depreciation

= Net Operating CF

1. What is the Net Investment (Initial Cash Outflow or CF0) for this project?

2. What is the Depreciation Expense in year one?

3. What is the Operating Cash Flow in year two for this project?

4. What is the after tax salvage value of selling the new machinery in three years?