LEE Corporation intends to purchase equipment for $1,500,000.The equipment has a 5-year useful life and will be depreciated on a straight-line basis.Addition of the equipment requires additional working capital of $20,000.The $20,000 is expected to be recaptured at the end of the project.LEE's marginal tax rate is 40%.Use of the equipment is expected to change the company's reported EBIT by $600,000 in year one,$700,000 in year two,$550,000 in year three,$200,000 in year four,and $100,000 in year five.Due to changing market conditions,the equipment did have a salvage value of $100,000 at the end of year five.
a.Calculate the initial outlay and the incremental free cash flows over the life of the project.
b.If the risk-adjusted discount rate for this project is 20%,calculate the project's net present value and internal rate of return and comment on the acceptability of the project.

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The Answer of LEE Corporation intends to purchase equipment for $1,500,000.The equipment has a 5-year useful life and will be depreciated on a straight-line basis.Addition of the equipment requires additional working capital of $20,000.The $20,000 is expected to be recaptured at the end of the project.LEE's marginal tax rate is 40%.Use of the equipment is expected to change the company's reported EBIT by $600,000 in year one,$700,000 in year two,$550,000 in year three,$200,000 in year four,and $100,000 in year five.Due to changing market conditions,the equipment did have a salvage value of $100,000 at the end of year five.
a.Calculate the initial outlay and the incremental free cash flows over the life of the project.
b.If the risk-adjusted discount rate for this project is 20%,calculate the project's net present value and internal rate of return and comment on the acceptability of the project.

LEE Corporation Intends to Purchase Equipment for $1,500,000