Lowell Inc. is thinking about replacing an old computer with a new one. The new one will cost $1,000,000 and will have a
Posted: Thu Dec 23, 2021 9:04 am
Lowell Inc. is thinking about replacing an old computer with a
new one. The new one will cost $1,000,000 and will have a life of
FOUR years. The new computer qualifies as 5-year MACRS
property.
Years
1
2
3
4
Depreciation rate
20%
32%
19%
12%
It will probably be worth about $360,000 after FOUR years.
The old computer is being depreciated at a rate of
$120,000 per year. It will be completely written off in FOUR years,
at that time it will have zero resale value. We can sell it now for
$360,000 after taxes. The new machine will save us $200,000 per
year in operating costs. The tax rate (federal plus state) is 25
percent and WACC is 8 percent. What is the TOTAL FREE CASH
FLOW FOR YEAR 4?
Free cash flow = Total Initial Investment + Total annual
project CF + Total Salvage Value
422,500
482,500
442,500
462,500
new one. The new one will cost $1,000,000 and will have a life of
FOUR years. The new computer qualifies as 5-year MACRS
property.
Years
1
2
3
4
Depreciation rate
20%
32%
19%
12%
It will probably be worth about $360,000 after FOUR years.
The old computer is being depreciated at a rate of
$120,000 per year. It will be completely written off in FOUR years,
at that time it will have zero resale value. We can sell it now for
$360,000 after taxes. The new machine will save us $200,000 per
year in operating costs. The tax rate (federal plus state) is 25
percent and WACC is 8 percent. What is the TOTAL FREE CASH
FLOW FOR YEAR 4?
Free cash flow = Total Initial Investment + Total annual
project CF + Total Salvage Value
422,500
482,500
442,500
462,500