(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 $60,000 per year. The machine has a purchase price of $100,000, 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 $20,000. 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 35 percent marginal tax rate, and a required rate of return of 7 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? a. The initial cash outlay associated with this project is $ (Round to the nearest dollar.) Cost of new plant and equipment: Shipping and installation costs: Unit sales: $14,200,000 $190,000 Year 1 2 3 4 5 Units Sold 80,000 135,000 135,000 90,000 80,000 Sales price per unit: Variable cost per unit: Annual fixed costs: Working-capital requirements: $340/unit in years 1 through 4, $290/unit in year 5 $100/unit $800,000 There will be an initial working capital requirement of $210,000 to get production started. For each year, the total investment in net working capital will be equal to 13 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 vears. The depreciation method: (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 $60,000 per year. The machine has a purchase price of $100,000, 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 $20,000. 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 35 percent marginal tax rate, and a required rate of return of 7 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? a. The initial cash outlay associated with this project is $ (Round to the nearest dollar.) Cost of new plant and equipment: Shipping and installation costs: Unit sales: $14,200,000 $190,000 Year 1 2 3 4 5 Units Sold 80,000 135,000 135,000 90,000 80,000 Sales price per unit: Variable cost per unit: Annual fixed costs: Working-capital requirements: $340/unit in years 1 through 4, $290/unit in year 5 $100/unit $800,000 There will be an initial working capital requirement of $210,000 to get production started. For each year, the total investment in net working capital will be equal to 13 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 vears. The depreciation method
