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2.7.d - cost-saving project valuation: You are considering a new piece of equipment to improve efficiency...

2.7.d - cost-saving project valuation: You are considering a new piece of equipment to improve efficiency at your plant. Specifically, you have the opportunity to purchase a drill press for $640,000 which will result in an estimated annual pre-tax savings of $270,000 for four years. The press has an estimated salvage sale price of $70,000 in year 4. The press requires you acquire spare parts costing $20,000. And in order to capture all efficiency gains from the new press, you must add $3,500 to your inventory in each year of utilization. Your tax rate is 35 percent and the appropriate discount rate for this project is 14 percent.

Assume the annual deprecation schedule for this piece of equipment for years 1, 2, 3, and 4 is, respectively, $150,000, $150,000, $150,000, $150,000.

What is the schedule of free cash flows from operations activities in years 0, 1, 2, 3, and 4, respectively?

$0, $228,000, $228,000, $228,000, $228,000
$0, $78,000, $78,000, $78,000, $78,000
$0, $175,500, $175,500, $175,500, $175,500
None of these values are correct.

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