Question 3 10 pts A firm is considering the purchase of a machine which would re

Question

Question 3 10 pts A firm is considering the purchase of a machine which would represent an investment of $36 million, and would be depreciated in a straightline basis over 3 years. Sales are expected to be $10 million per year, and operating costs 22% of sales. The company is currently paying $4 million in interest per year, has a tax rate of 40%, and a WACC of 10%. What is the company's free cash flow for year 1 of this project? Enter your answer in millions of dollars, rounded to 1 decimal, and without the dollar sign. For example, if your answer is 10.5678, enter 10.6. Use the minus sign (-') if cash flow is negative.

Explanation / Answer

Question :3 Answer is "$8.6 Millions" Initial Investment =$36 Millions depreciation Per anum = Cost of asset / Life of the asset =$36 Millions /3 years =$12 Millions Expected sales $10 Millions Less: Operating Expenses (22%*$10 Millions) $2.2 Millions Less: Depreciation $12 Millions Income /(Loss) before tax ($4.2) Millions Less: tax (40%*($4.2 Millions)) (1.68) Millions Income /(Loss) After tax (4.2-1.68) ($2.52) Millions Add: depreciation $12 Millions Net cash flows after tax $9.48 Millions Present value factor at 10% at 1 year 0.9091 present value net cash flow for 1 st year $8.61818 Millions present value net cash flow for 1 st year (Rounded off) $8.6 Millions

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