GT, Inc. is considering the purchase of a new production machine for 200,000 SAR. The purchase of this machine will result in an increase in earnings before interest and taxes of 50,000 SAR per year. To operate the machine properly, workers would have to go through a brief training session that would cost 5,000 SAR after taxes. It would cost 5,000 SAR to install the machine properly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of 20,000 SAR. This machine has an expected life of 10 years, after which it will have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow 100,000 SAR at 8 percent interest from its local bank, resulting in additional interest payments of 8,000 SAR per year. Assume that the firm uses the bonus depreciation method and that GT, Inc. is very profitable, and if there are any losses from this project in year 1, GT, Inc. will be able to receive the tax benefits from those losses in year 1, a 21 percent marginal tax rate, and a required rate of return of 10 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, and 2 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?