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Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $110,000. A new building will cost $150,000 and will be depreciated on a straight-line basis over 16 years to a salvage value of $0. Actual land salvage at the end of 16 years is expected to be $170,000. Actual building salvage at the end of 16 years is expected to be $180,000. Equipment for the facility is expected to cost $230,000. Installation costs will be an additional $30,000 and shipping costs will be $12,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage at the end of 16 years is $0. The project will require net working capital of $50,000 initially (year 0), an additional $40,000 at the end of year 1, and an additional $40,000 at the end of year 2. The project is expected to generate increased EBIT (operating income) for the firm of $120,000 during year 1. Annual EBIT is expected to grow at a rate of 4 percent per year until the project terminates at the end of year 16. The marginal tax rate is 40 percent.
Problem 1: Compute the initial net investment.
Problem 2: Compute the annual net cash flow from the project in year 16.
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