Case

Hyundai Motor Company is considering the purchase

of a new chassis fabrication machine for $$1,400,000.$ The purchase of this machine

will result in an increase in earnings before interest and taxes of $$250,000$ per year. To

operate this machine properly, workers will have to go through a brief training ses$-$sion that would cost $$28,000$ after taxes. It

would cost $$8,000$ to install the machine

properly. Also, because the machine is extremely efficient, its purchase would neces$-$sitate an increase in inventory of $$35,000.$

This machine has an expected life of $10$

$,$ years, after which it will have no salvage value. Assume simplified straight$-$line

depreciation and that this machine is being depreciated down to zero, a $21$ percent

marginal tax rate, and a required rate of return of $13$ percent.

$,$ 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 $10($what is the annual after$-$tax cash

flow in year $10$ plus any additional cash flows associated with the termination

of the project$)?$

d$.$ Should the machine be purchased?