HiTech Corporation is considering investing in specialized machinery with a 2-year life that will generate significant cash savings during its life. The details related to this investment are:

Initial investment made at the beginning of year 1 = $2,000,000, depreciated using straight-line method over 2 years, no residual value at the end of life.

Initial working capital requirement made at the beginning of year 1 = $500,000, fully recovered at the end of year 2.

Year 1 pre-tax operating cash inflows = $1,600,000;

Year 2 pre-tax operating cash inflows = $2,500,000

HiTech has a tax rate of 30% and uses a 25% required rate of return to discount after-tax cash flows.

Required:

1. Year 1 free cash flows (don't include initial investment)
2. Year 2 free cash flows (don't forget to account for recovery of working capital)
3. The Net Present Value (NPV) of the investment.Note 1/1.25 = 0.8; 1/1.25^2 = 0.64.Assume as in standard NPV analysis that the free cash flows are realized at the end of respective years.

Answer rating: 100% (QA)

Answer To calculate the year 1 free cash flows we need to subtract the taxes from the pretax operati... View the full answer