Question
(Calculating project cash flows and NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine.The purchase of this machine will result
(Calculating project cash flows and NPV)The Guo Chemical Corporation is considering the purchase of a chemical analysis machine.The purchase of this machine will result in an increase in earnings before interest and taxes of $ 65,000 per year.The machine has a purchase price of $ 350,000, and it would cost an additional $ 6,000 after tax to install this machine correctly.In addition, to operate this machine properly, inventory must be increased by $ 18,000. This machine has an expected life of 10 years, after which time it will have no salvage value. Also, assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 38 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 flow associated with termination of the project)?
d. Should this machine be purchased?
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