solution

Use the following information to answer the next three questions: A company is evaluating a new project by discounting the expected cash flows using its WACC. The following information is known about the project: • Two years ago, the company paid $1,500,000 for the land and building that will house the project. The property could be sold for $3,000,000 today. Its book value is the purchase price. • One year ago, the firm spent $75,000 on initial marketing for the project. • The project requires the purchase of equipment (in year 0) for $600,000. • The firm will pay $15,000 in interest expense to finance the project. • The machine will be fully depreciated straight-line in years 1-6. • The project will generate sales of $750,000 per year and expenses of $400,000 per year for years 1-6. • In year 1, the firm must increase its inventory by $30,000. It will maintain the new level of inventory through year 6. • The marginal tax rate is 30%.

25. What is the cash flow related to the land and building in time 0? A) 2,550,000 B) (2,550,000) C) 1,800,000 D) (1,800,000)

26. What is the free cash flow for time 0? A) (3,150,000) B) (600,000) C) (2,400,000) D) (1,800,000)

27. What is the free cash flow for time 1? A) 230,000 B) 145,000 C) 245,000 D) 305,000