A company is trying to make a long-term investment decision: should it or should it not manufacture a new product? The company believes that $290,000 would need to be immediately invested into buying the required production equipment. At the end of Year 4 this investment project is likely to end. When that happens, all used equipment will be sold and bring the company $144,000 as the after-tax salvage value. A cash reserve in the amount of $35,000 would need to be set aside when the project begins, so that the company can cover any kind of repair costs to maintain the equipment, should those arise. This cash reserve will be increased by $8,000 each year and recovered when the project ends. The company estimates $78,000 in after-tax profits (i.e., operating cash flow) each year of the project. The required rate of return is 7.5%.
