Calculate the annul free cash flow

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Company Shoe Plus considers selling the machines it bought 3 years ago for £600,000 and replace them by new machines. The old machines have been depreciated linearly,1 year of depreciation is left, and can be sold right now for £200,000. The new machine require an investment of £800,000 and will be depreciated linearly over 4 years. The ?rm expects that this machine can also be sold at £200,000 in year 4. As a result ofthis investment, the next 4 years an annual saving of £100,000 in wages and an annual saying of € 120,000 in energy costs can be realized. The annual maintenance costs will increase from £540,000 to £565,000 annually. The project will have no impact on the ?rm's assets is 1.2.the betalunlevered) of the ?rm is 1.1 and the project's beta is 1.4. The project will be completely ?nanced by equity. The risk free rate is 2% and the market risk premium is 6%. The company is pro?table and the tax rate is 30%.

A) Calculate the annul free cash flow.

B) What is the appropriate discount rate for this projectl explain brie?y?

Reference no: EM133117016

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