Marlin Manufacturing is considering whether to add new capacity to its production line with the addition of

Question:

Marlin Manufacturing is considering whether to add new capacity to its production line with the addition of a $1 million assembly center. This purchase would result in an increase in earnings before interest and taxes of $400,000 per year. It would cost $50,000 after taxes to install the needed equipment; in addition, to operate this machine properly, workers would have to go through a brief training session that would cost $10,000 after taxes. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $150,000.

This machine has an expected life of 10 years, after which time it would have no salvage value. Assume the use of the simplified straight-line method to depreciate this machine down to zero, a 34 percent marginal tax rate, and a required rate of return of 12 percent.

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

b. What are the annual net 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 free cash flow in Year 10 plus any additional cash flows associated with termination of the project)?

d. Should this machine be purchased?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...