You have been asked by the president and CEO of Kidd Pharmaceuticals to evaluate the proposed acquisition of a new labeling machine for one of the firmâ€™s production lines. The machineâ€™s price is $50,000, and it would cost another $10,000 for transportation and installation. The machine falls into the MACRSthree-year class, and hence the tax depreciation allowances are 0.33, 0.45, and 0.15 in Years 1, 2, and 3, respectively. The machine would be sold after three years because the production line is being closed at that time. The best estimate of the machineâ€™s salvage value after three years of use is $20,000. The machine would have no effect on the firmâ€™s sales or revenues, but it is expected to save Kidd $20,000 per year in before-tax operating costs. The firmâ€™s tax rate is 40 percent and its corporate cost of capital is 10 percent.
a. What is the projectâ€™s net investment outlay at Year 0?
b. What are the projectâ€™s operating cash flows in Years 1, 2, and 3?
c. What are the terminal cash flows at the end of Year 3?
d. If the project has average risk, is it expected to be profitable?