Question

P12-16 (similar to) Question Help (Calculating project cash flows and NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $85,000 per year. The machine has a purchase price of $150.000, and it would cost an additional $6.000 fer tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $20,000. This machine has an expected life of 10 years, after which time it will have no salvage value Also, assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 37 percent marginal tax rate, and a required rate of return of 12 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 through 9? c. 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)? d. Should this machine be purchased? a. The initial cash outlay associated with this project is $ (Round to the nearest dolar) Enter your answer in the answer box and then click Check Answer Check Answer 2 Clear All parts remaining

Answer 1

a: $176000

b: $59322

c: $79322

d: Yes, Since NPV is positive at $165622

Workings

Year	Initial cost	tax shield	After tax net revenue EBIT*(1-Tax)	Working capital	Net cash flows
0	-156000			-20000	-176000
1		5772	53550		59322
2		5772	53550		59322
3		5772	53550		59322
4		5772	53550		59322
5		5772	53550		59322
6		5772	53550		59322
7		5772	53550		59322
8		5772	53550		59322
9		5772	53550		59322
10		5772	53550	20000	79322

Book1- Excel AutoSave Oi Sign in O Tell me what you want to do Comments Share File Home Formulas Review View Help Insert Draw Page Layout Data Σ X Insert = = A A General Calibri 10 Delete Conditional Format as Find & Cell Sort & Paste A B I U E- Format T T T Formatting Table Filter Select Styles Clipboard Font Alignment Number Styles Cells Editing г. Initial cost B2 A C D E F G 1 Year Initial cost tax shield After tax net revenue Working capital Net cash flows EBIT (1-Tax) 3 0 SUM(B3:E3) NPV NPV(12%,F4:F13)+F3 - 150000-6000 -20000 =37% 156000/10 85000*(1-37%) =37% 156000/10 85000*(1-37%) 37%*156000/10 -85000 (1-37 %) 37%*156000/10 -85000 (1-37 %) 37%*156000/10 -85000 (1-37 %) =37% 156000/10 85000*(1-37%) =37% 156000/10 =85000*(1-37%) =37% 156000/10 =85000*(1-37 %) 37%*156000/10 -85000 (1-37 %) 37%*156000/10 85000 (1-37 %) 4 1 SUM(B4:E4) - SUM( B5: E5 ) SUM(B6:E6 5 2 6 3 SUM(B7:E7) 7 4 8 5 SUM (B8:E8) 9 6 SUM(B9:E9) 10 7 =SUM(B10 : E10) 11 8 =SUM(B11:E11) 12 9 SUM(B12:E12) -SUM(B13: E13) 13 10 20000 14 15 16 17 Sheet1 Sheet2 Sheet4 Sheet3 Sheet5 Sheet6 Sheet7 Sheet8 Sheet9 +100 % E Ready w P3 ENG (? 6:26 AM