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Description of Project Analysis

The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $70,000 per year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 after tax to install this machine properly. In addition, to operate this machine properly, inventory must be increased by $15,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also, assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax rate, and a required rate of return of 15 percent.

a. What is the initial outlay associated with this project?

b. What are the annual after-tax cash flows associated with this project, for years 1 through 9?

c. What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flow associated with termination of the project)?

d. Should this machine be purchased?

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Solution Preview

a. What is the initial outlay associated with this project?
<br>the initial outlay = purchase price +install fee +working capital of inventory = 250,000+10,000 +15000= $275000
<br>
<br>b. What are the annual after-tax cash flows associated with this project, for years 1 through 9?
<br>Annual ...

$2.19