Problem:

The total cost for the new capital totals $718,000 with installation costs of $5,000. Inventories will increase by 6,500, accounts receivable will increase by 4,000 and accounts payable will increase by 3500. The new capital is expected to be used for 5 years. The new item would be depreciated under MACRS using a 5-year recovery period. At the end of 5 years the machine can be sold for 95,000. The current, 4 year old machine can be sold for 112,000 before taxes and is being depreciated as a 7 year asset under MACRS. At the end of 5 years it is expected that this machine can be sold for 10,000. The new machine is expected to generate $380,000 in profits before depreciation and taxes for each of the next 5 years.  The existing machine is expected to generate $190,000 in profits before depreciation and taxes for each of the next 5 years.  The firm is subject to a 40% tax rate on both ordinary income and capital gains.

Requirement:

Question 1: What is the net initial investment?

Question 2: Show the project's operating cash flow statement for each year of operations.  What is the expected non-operating terminal cash flow when the project is terminated at Year 5?

Question 3: What are the projects NPV?

Note: Show supporting computations in good form.