BA] TAP BUfir 5 212 PROJECT VALUATION Carson Electronics is currently considering whether to acquire a new materialshandling machine for its manufacturing operations. The machine costs $760,000 and will be depreciated using straightline depreciation toward a zero salvage value over the next five years. During the life of the machine, no new capital expenditures or investments in working capital will be required. The new materialshandling machine is expected to save Carson Electronics $250,000 per year before taxes of 30%. Carson's CFO recently analyzed the firm's opportunity cost of capital and estimated it to be 9%. a. What are the annual free cash ows for the project? b. What are the project's NPV and IRR? Should Carson Electronics accept the project? 210 PROJECT VALUATION Glentech Manufacturing is considering the purchase of an automated parts handler for the assembly and test area of its Phoenix, Arizona, plant. The handler will cost $250,000 to purchase plus $10,000 for installation. If the company undertakes the investment, it will automate part of the semiconductor test area and reduce operating costs by $70,000 per year for the next ten years. Five years into the life of the investment, however, Glentech will have to spend an additional $100,000 to update and refurbish the handler. The investment in the handler will be depreciated using straightline depreciation over ten years, and the refurbishing costs will be depreciated over the remaining fiveyear life of the handler (also using straightline depreciation). In ten years, the handler is expected to be worth $5,000, although its book value will be zero. Glentech's tax rate is 30%, and its opportunity cost of capital is 12%. Exhibit P210.1 contains cash flow calculations for the project that can be used in performing a DCF evaluation of its contribution to firm value. Answer each of the following questions concerning the project: 15 this a good project for Glentech ? Explain your answer. 28 INTRODUCTORY PROJECT VALUATION South Tel Communications is considering the purchase of a new software management system. The system is called B-Image, and it is expected to reduce drastically the amount of time that company technicians spend installing new software. South Tel's technicians currently spend 6,000 hours per year on installations, which costs South Tel $25 per hour. The owners of the BImage system claim that their software can reduce time on task by at least 25%. The system requires an initial investment of $55,000 and an additional investment of $10,000 for technician training on the new system. Annual upgrades will cost the firm $15,000 per year. The tax treatment of software purchases sometimes calls for amortization of the initial cost over time,' sometimes the cost can be expensed in the year of the purchase. Before the tax experts are consulted and for purposes of this initial analysis, South Tel has decided that it will expense the cost of the software in the year of the expenditure. South Tel faces a 30% tax rate and uses a 9% cost of capital to evaluate projects of this type. a. Assume that South Tel has sufficient taxable income from other projects so that it can expense the cost of the software immediately. What are the free cash flows for the project for years zero through five