Question

(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 $60,000 per year. The machine has a purchase price of $350,000, and it would cost an additional $8,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $14,000. 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 11 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 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 dollar.)

Answer 1

1.
=350000+8000+14000=372000

2.
=60000*(1-37%)+(350000+8000)/10=73600

3.
=60000*(1-37%)+(350000+8000)/10+14000=87600

4.
Yes purchase as NPV is positive
NPV=-(350000+8000+14000)+(60000*(1-37%)+(350000+8000)/10)/11%*(1-1/1.11^10)+14000/1.11^10=66378.0587228356