Question
(Calculating project cash flows and NPV)The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result
(Calculating project cash flows and NPV)The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $ 33 comma 000 per year, it has a purchase price of $110 comma 000, and it would cost an additional $4 comma 000 after tax to correctly install this machine. In addition, to properly operate this machine, inventory must be increased by $5 comma 500. This machine has an expected life of 10 years, after which 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 11 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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