Calculate the estimated free cash flow of the machine

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Reference no: EM132523134

Point 1: A firm considers to buy a machine in 2020. The cost of the machine is $ 3 000 000 which will be paid in 2020. The economic lifetime of the machine is 5 years (the machine will generate cashflows fort he firm starting in 2021). The firm estimates that the new machine will increase the sales revenue of the firm by $ 1 500 000 in each of the next 5 years. The COGS is estimated to be 40% of the sales revenue. The general and administrative costs are estimated to be 10% of the sales revenue. The firm uses 5-year straight line depreciation and is allowed to write off $ 600 000 depreciation expense in each of the next 5 years. The firm is subject to a 20% tax rate. The firm also estimates that the new machine will lead to a $ 50 000 increase in inventories, $ 70 000 increase in accounts receivables and $ 20 000 increase in accounts payables receivables in 2021. There will be no change in NOWC (net operating working capital) in 2022 and 2023. Some of the items in inventories will be sold and some account receivables will be collected in 2024 leading to a $ 40 000 decrease in NOWC in 2024. The NOWC will decline by $ 60 000 in 2025. The firm also estimates that this machine can be sold by the end of 2025 at a salvage value of $ 500 000. Given all this information

Question A) Calculate the operating cash flow of this machine for 2021, 2022, 2023, 2024 and 2025.

Question B) Calculate the estimated free cash flow of this machine for 2020, 2021, 2022, 2023, 2024 and 2025.

Question C) Calculate the Net PV of this project and decide if buying this machine is a feasible investment

Reference no: EM132523134

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