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 $$300,000$ after FOUR years. The old computer is being depreciated at a rate of $$100,000$ 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 $$400,000$ after taxes. The new machine will save us $$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

$445,000$

$467,500$

$480,000$

$422,500$