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Will someone tell me if this is right or wrong? Thanks.
In-class Chapter 11 11-11. (New project analysis) Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before depreciation, interest, and taxes of $150,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $25,000 after taxes. It would cost $5,000 to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory of $30,000. This machine has an expected life of 10 years, and will be depreciated down to zero using the bonus depreciation method with that depreciation taking place in year 1. Assume 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 the machine be purchased? ) Particulars Initial Outlay Cost of new machine $500,000 Cost of installation $5,000 Training to operate machine S25,000 Increase in net working capital $30,000 Initial outlay (A) S560,000 The initial outlay associated with this project is $560,000. Annual after-tax cash flows: Operating cash flow for year 1 S224,550 Year 2 S118,500 Year 3 S118,500 Year 4 S118,500 Year 5 S118,500 Year 6 $118,500 Year 7 S118,500 Year 8 S118,500 Year 9 S118,500 Operating cash flow for year 10 + recovery of working capital = terminal cash flow for year 10 $118,500 + $30,000 = $148,500 The terminal cash flow for year 10 is $148,5po. The machine should be purchased because the NPV of the project has net positive cash flows. NPV of project $134,357.01. In-class Chapter 11 11-11. (New project analysis) Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before depreciation, interest, and taxes of $150,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $25,000 after taxes. It would cost $5,000 to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory of $30,000. This machine has an expected life of 10 years, and will be depreciated down to zero using the bonus depreciation method with that depreciation taking place in year 1. Assume 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 the machine be purchased? ) Particulars Initial Outlay Cost of new machine $500,000 Cost of installation $5,000 Training to operate machine S25,000 Increase in net working capital $30,000 Initial outlay (A) S560,000 The initial outlay associated with this project is $560,000. Annual after-tax cash flows: Operating cash flow for year 1 S224,550 Year 2 S118,500 Year 3 S118,500 Year 4 S118,500 Year 5 S118,500 Year 6 $118,500 Year 7 S118,500 Year 8 S118,500 Year 9 S118,500 Operating cash flow for year 10 + recovery of working capital = terminal cash flow for year 10 $118,500 + $30,000 = $148,500 The terminal cash flow for year 10 is $148,5po. The machine should be purchased because the NPV of the project has net positive cash flows. NPV of project $134,357.01
