### What is the year zero project cash flow

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XYZ Inc. needs to install a new manufacturing machine. The base price is \$100,000. Installation costs are \$10,000. After 3 years the machine will be sold for \$75,000. Applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The machine would require a \$5,000 increase in net operating working capital (increased inventory less increased accounts payables). Revenue would not be affected. Pretax labor costs would decline by \$40,000 per year. The marginal tax rate is 40 percent, and the WACC is 10 percent. Also, the firm spent \$7,000 in feasibility tests.

\$7,000 was spent last year. How should this be handled?

For capital budgeting purposes, what is the initial investment outlay for the machine? That is, what is the Year 0 project cash flow?

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