You are considering adding a new line to its product mix in your company, Columbia Casting Company. This project will have a two year life as the demand for this new product is expected to disappear at that time. The company invested $5,000 last year in collecting marketing information about the new product. This expenditure was very important to gaining an understanding of the product market and would not have been made except to gain that information. The production line for the new product will be set up in the unused space in the main plant. The company also spent $10,000 putting a new roof on the main plant where the new product line will be installed.

The production machinery needed for the project will cost $180,000. The equipment has an economic life of four years and will be depreciated using straight line depreciation over 4 years (and it will be depreciated to zero). The machine is expected to have a market value of $25,000 after two years of use and will be sold at that point. The plant accountant, Fabricio Mafiozio, told you that he will charge a General Factory Expense to the new project that will be $3,000 per year and that the project would get charged an interest expense equal to 10 percent of the original invoice price for the equipment. The General Factory Expense is related to indirect labor support (i.e. secretaries), and this indirect labor personnel is currently employed at the firm and can take on duties associated with the new production mix line without extra pay. The companys tax rate is 40 percent and its weighted average cost of capital for this project is 15 percent. Assume there are no Net Working Capital expenditures associated with this project. You are evaluating whether to undertake the investment in this new product mix while questioning the suggestions of your plant accountant.

(Answer the questions below using the information provided here. It might help to work out the valuation for this problem either on paper or in Excel.)

1.Please, refer to the problem above about Columbia Casting Company. What is the proper cash flow to be documented at the beginning of the project, in Year 0?

Group of answer choices

(-$198,000)

(-$203,000)

(-$213,000)

(-$180,000)

2.Please, refer to the problem above about Columbia Casting Company. What is the after-tax salvage value of the equipment in Year 2 (when the project is finished and the equipment is sold)?

Group of answer choices

(-$1,000)

$26,000

(-$11,000)

$25,000

$51,000

3. Please, refer to the problem above about Columbia Casting Company. Given the information provided above and that annual Revenues of $390,000 and Costs of $195,000 are associated with the new project, what do you think the annual OCF should be (select the closest estimate):

Group of answer choices

$135,000

$88,200

$90,000

$122,400

$133,200