After extensive research, which cost the company $20,000 last year, Cameron Industries has decided to purchase...

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After extensive research, which cost the company $20,000 last year, Cameron Industries has decided to purchase a new chemical vapor depositor in order to make silicon chips. The machine will cost $2,800,000 and is expected to raise gross profits by $2,000,000 per year, starting at the end of the first year, with associated costs of $600,000 for each of those years. The machine is expected to have a working life of four years and will be depreciated straight- line to a salvage value of zero over those four years. At the end of year five, you can sell the machine for $90,000. The company will also have to invest $5,000 in net working capital at year 0. The net working capital will be recovered at year 4. The marginal tax rate is 30%. A. What is the incremental free cash flows for year 5? B. What is the NPV of the investment? Is this a good investment? After extensive research, which cost the company $20,000 last year, Cameron Industries has decided to purchase a new chemical vapor depositor in order to make silicon chips. The machine will cost $2,800,000 and is expected to raise gross profits by $2,000,000 per year, starting at the end of the first year, with associated costs of $600,000 for each of those years. The machine is expected to have a working life of four years and will be depreciated straight- line to a salvage value of zero over those four years. At the end of year five, you can sell the machine for $90,000. The company will also have to invest $5,000 in net working capital at year 0. The net working capital will be recovered at year 4. The marginal tax rate is 30%. A. What is the incremental free cash flows for year 5? B. What is the NPV of the investment? Is this a good investment?

Answer rating: 100% (QA)

SOLUTION To calculate the incremental free cash flow for year 5 we need to consider the cash inflows and outflows specific to that year Given informat... View the full answer