Stafford Motors is considering the purchase of a new production machine for $1,000,000. Although the purchase of this machine will not produce any increase in sales revenues, it will result in a before-tax reduction of labor costs by $400,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $100,000. In addition, it would cost $50,000 to install this machine properly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $150,000. 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 be being depreciated down to zero, a 34% marginal tax rate, and a required rate of return of 12%.

1. What is the initial outlay associated with this project?

2. What are the annual after-tax cash flows associated with this project, for years 1-9?

3. What is the terminal cash flow in year 10 (i.e., What is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?

4. Should this machine be purchased?