Lowell Inc. projects unit sales for a new project with a life of FOUR YEARS as follows: Year Unit Sales 1 10,000 2 12,00

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Lowell Inc. projects unit sales for a new project with a life of
FOUR YEARS as follows:
Year
Unit Sales
1
10,000
2
12,000
3
14,000
4
16,000
Production will require Lowell must have an amount of NOWC on
hand equal to 12 percent of the upcoming year’s sales.
Total fixed costs are $100,000 per year, variable production costs
are $240 per unit, and the units are priced at $300 each. The sale
price and variable costs will increase by 2 percent every
year. The equipment needed to begin production has an
installed cost of $2,000,000. The equipment qualifies as 5-year
MACRS property.
Years
1
2
3
4
Depreciation rate
20%
32%
19%
12%
In FOUR years, this equipment can be sold for about 24 percent
of its acquisition cost. Lowell is in the 25 percent marginal tax
bracket and has a required return on all its projects of 18
percent. Based on these preliminary project estimates, what is
the Free Cash Flow for the Year 0 of the project?
Free cash flow = Total Initial Investment + Total annual project
CF + Total Salvage Value
-2,330,000
-2,360,000
-2,390,000
-2,300,000