Answered step by step
Verified Expert Solution
Question
1 Approved Answer
(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $350,000. The purchase of this machine will
(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $350,000. 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 $23,000 after tax. In addition, it would cost $3,500 after tax to install this machine correctly. Also, because this machine is extremely efficient its purchase would necessitate an increase in inventory of $20,000. 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 35 percent marginal tax rate, and a required rate of return of 13 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? a. The initial cash outlay associated with this project is $396500 (Round to the nearest dollar) b. The annual after tax cash flows associated with this project for years 1 through 9 are $(Round to the nearest dollar) C. The terminal cash flow in year 10 (that is, the annual after tax cash flow in year 10 plus any additional cash flow associated with termination of the project) is (Round to the nearest dollar) si d. Given the information, the machine (Select the best choice below.) A. should not be purchased because the NPV is - $166,396, making it an unacceptable investment for the company O B. should be purchased because the NPV is $166, 396, making it a worthwhile investment for the company
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started