(Calculating project cash flows and NPV) Marlin Manufacturing is considering whether to add new capacity to its production line with the addition of a

$700,000

assembly center. The purchase would result in an increase in earnings before interest and taxes of

$250,000

per year. It would cost

$80,000

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

$40,000

after taxes. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of

$100,000.

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

31

percent marginal tax rate, and a required rate of return of

9

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 theproject)?

d. Should this machine be purchased?