Question

ANSWER ALL PARTS! B-D

Calculating project cash flows and NPV) The Gun 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 $90.000 per year The machine has a purchase price of $100,000, and I would cost an additional 59,000 after fax to install this machine Correctly in addition to operate this machine properly, ventory must be increased by $18,000 This machine has an expected life of 10 years, after which are it will have no salvage valueconsume m ed straight ne depreciation that this machine is being depreciated down to zero, a Jo percent marginal tax rate, and a required rate of return of 9 percent a. What is the initial outly associated with this project? b. What are the annual for tax cash flows sociated with this project for years through 97 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 5 127000 (Round to the nearest dollar) b. The annual fer-tax cash flows associated with this project for years through 9 are 566270 (Round to the nearest dolar) Erw i n the m and then click Check Answer

Answer 1

a: $127000

b: $66270

c: $84270

d: The machine should be purchased since NPV is positive at $305901.57

Workings

Year	Outlay= -Purchase price-Installation	tax shield= Tax rate*(Initial cost/useful life)	EBIT*(1-Tax rate)	Working capital	Net cash flow
0	-109000			-18000	-127000
1		3270	63000		66270
2		3270	63000		66270
3		3270	63000		66270
4		3270	63000		66270
5		3270	63000		66270
6		3270	63000		66270
7		3270	63000		66270
8		3270	63000		66270
9		3270	63000		66270
10		3270	63000	18000	84270

NPV

305901.57

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