Giant Corp.is considering a project that requires a $1,500 initial cost for a new machine that will be depreciated straight line to a salvage value of 0 on a 5-year schedule.The project will require a one-time increase in the level of net working capital of $300.The project will generate an additional $1,600 in revenues and $700 in operating expenses each year.The project will end at the end of year 2,at which time the machinery is expected to be sold for $800.Giant's tax rate is 50%.In a discounted cash flow analysis of this project,what would be the projected Year 0 free cash flow?

Question

Quizplus · Accepted Answer

The projected Year 0 free cash flow is the initial cost of the new machine ($1,500) plus the one-time increase in net working capital ($300), totaling $1,800. This results in a cash outflow, hence -$1,800.