Question
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
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 $35,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $5,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also, assume the bonus depreciation method with the bonus depreciation occurring in year 1 and the firm has enough income in other areas to take advantage of any tax benefits of any losses on this project in year 1, a 21 percent marginal tax rate, and a required rate of return of 15 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 this machine be purchased?
Could this be done without Excel?
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