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