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 before interest and taxes of $32,000 per​ year, it has a purchase price of $95,000 and it would cost an additional $3,000 after tax to correctly install this machine. In​ addition, to properly operate this​ machine, inventory must be increased by $5,500 This machine has an expected life of

10 years, after which it will have no salvage value. ​ Also, assume simplified​ straight-line depreciation, that this machine is being depreciated down to​ zero, a 31 percent marginal tax​ rate, and a required rate of return of 8 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 through 9?

c.  What is the terminal cash flow in year 10 (that is, the annual​ after-tax cash flow in year

10plus any additional cash flows associated with termination of the​ project)?

d.  Should this machine be​ purchased?

Answer 1

Increment Net Deprecia Free cash PVIF@ working capital Investment al cash Net Таx@31% | income Year ЕBIT flows flows 8% Present value tion $(5,500) $(98,000) $(103,500) 1.000 $ 0.926 $ 0.857 $ 0.794 $ 0.735 $ 0.681 $ 0.630 $ 0.583 $ 0.540 $ 0.500 $ 0.463 $ (103,500) 0 1 $32,000 $9,920 $22,0809,800 31,880 2 $32,000 $ 3 $32,000 $ 4 $32,000 $9,920 $22,080 9,800 31,880 5 $32,000 $9,920 $22,080 9,800 31,880 $32,000 $ 7 $32,000 $ 8 $32,000 $ 9 $32,000 $ 10 $32,000 $ 9,920$22,080 9,800 $ 31,880 5,500 $31,880 $31,880 29,519 9,920 $22,080 9,800 31,880 9,920 $22,080 9,800 31,880 27,332 $31,880 25,307 $31,880 23,433 $31,880 21,697 9,920 $22,080 9,800 31,880 9,920 $22,080 9,800 31,880 9,920 $22,080 9,800 31,880 9,920 $22,080 9,800 31,880 $31,880 20,090 $31,880 18,602 $31,880 17,224 $31,880 15,948 $37,380 17,314 $112,965 Net present value -$103,500 a) 31,880 b) 37,380 c) d) Yes, NPV> $0.

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