Clarion Enterprises is considering an investment in a new digital reader for use in its inventory management system. The reader will cost $50,000 to purchase and install, will be depreciated over a five-year life using straight-line depreciation toward a $10,000 salvage value in five years. The firm’s analyst estimates that the new reader will reduce the firm’s inventory costs by $30,000 per year, which means that the firm’s net operating profits will increase by $22,000 per year after depreciation expense. If the firm purchases the reader there will be no need to increase the firm’s working capital, nor will there be any added capital expenditures over the five-year investment life. If Clarion faces a 30% marginal tax rate, what will be the free cash flow to the firm from the new reader in years 0 through 5?
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