Question
SONATRAC.Inc is considering the purchase of a new production machine for $200.000. The purchase of this machine will result in an increase in earnings before
SONATRAC.Inc is considering the purchase of a new production machine for $200.000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50.000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5.000 after taxes. In addition, it would cost $5.000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20.000. This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified straight-linear depreciation, that this machine is being depreciated down to zero, a 34% tax rate, and a required rate of return of 10%.
- What is the initial outlay associated with this project?
- What are the annual after-tax cash flows associated with this project for year 1 through 9?
- 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)?
- Should this machine be purchased? Find the project NPV.
- If the project's appropriate discount rate for this machinery is now 15%, what is the project's discounted payback period?
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