Your company is thinking about taking on a machine replacement project. In analyzing the project, the financial staff has brought together the following information: 1. The new machine will require an initial capital outlay of $125,000 at Year 0. This equipment will be depreciated straight-line the four years of the project's life. 23 4. 5. 6. 7. 8. 9. 10. 10 The equipment will have no salvage value at the end of four years. The machine being replaced is fully depreciated (book value of zero), and can be sold immediately for $25,000. Inventories will rise by $8,000 at Year 0, and accounts payable will rise by $3,000 at Year 0. This increase in net operating working capital will be recovered at the end of the project's life, Year 4. The new project is expected to have an economic life of four years. The business is expected to generate new sales of $80,000 at Year 1, $120,000 at Year 2, $100,000 at Year 3, and $80,000 at Year 4. Each year, operating costs (excluding depreciation) are expected to be 60 percent of sales. The company expects to incur interest expense of $4,000 in each of the next 4 years. Because of negative externalities with other divisions within the company, this project will take away (destroy) $875 of value (after-tax) each year. The company's tax rate is 40 percent. The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden. The project's weighted average cost of capital (WACC) is 12 percent. What is the total Free Cash Flow for year 0? ABCDE A. - $100,000 B. - $115,000 C. - $125,000 D. - $135,000 E. - $141,000