Locus Quintatus, Inc., a highly profitable maker of customized chariots, is planning to introduce a new model shortly. The firm must purchase equipment immediately at a cost of $900,000. Freight and installation costs for this equipment will be $100,000. The equipment will be depreciated as a 7-year class asset under MACRS. During the first year, Locus will have incremental operating expenses of $300,000 that are attributable to this project. Locus expects to be able to sell 1,000 chariots during year 2 at an average price of $800 each and to incur operating expenses of $300,000. Also, Locus expects its net working capital investment will increase by $50,000 during year 2. (Assume all operating costs and revenues are incurred at the end of each year.) The marginal tax rate for Locus is 40 percent. (Hint: See Appendix 9A for information on MACRS depreciation.) What is the required net investment, and what are the year 1 and year 2 net cash flows?
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