Question
(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $ 550,000. The purchase of this machine
(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $ 550,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $ 100,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $ $26,000 after tax. In addition, it would cost $ 6,000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $ 24,000. This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 30 percent marginal tax rate, and a required rate of return of 12 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 (that is, the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?
d. Should this machine be purchased?
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