(Calculating project cash flows and NPV) Weirs Trucking, Inc., is considering the purchase of a new production...

Question:

(Calculating project cash flows and NPV) Weir’s Trucking, Inc., is considering the purchase of a new production machine for $100,000. The purchase of this new machine would result in an increase in earnings before interest and taxes of $25,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5,000 after taxes. In addition, it would cost $5,000 after taxes to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $25,000. This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $80,000 at 10 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. 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?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial Management Principles And Applications

ISBN: 9781292222189

13th Global Edition

Authors: Sheridan Titman, Arthur Keown, John Martin

Question Posted: