(New

project

analysis)

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

$30,000

per year, it has a purchase price of

$200,000,

and it would cost an additional

$6,000

to properly install the machine. In addition, to properly operate the machine, inventory must be increased by

$6,000.

This machine has an expected life of

10

years, after which it will have no salvage value. Also, assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a

31

percent marginal tax rate, and a required rate of return of

13

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 (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 this machine be purchased?