Question

4. (Now proiect analysis) 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 $38.000 per year It has a purchase price of $180,000, and it would cost an additional $8,000 to property install the machine. In addition to properly operate the machine, inventory must be increased by $6.000. This machine has an expected life of 10 years after which it will have no salvage value. Also, assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 33 percent marginal tax rate, and a required rate of return of 14 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 (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 this machine be purchased? a. What is the initial outlay associated with this project? $ 194,000 (Round to the nearest dollar.) b. What are the annual after-tax cash flows associated with this project for years 1 through 9 (note that the cash flows for years 1 through 9 are equal)? (Round to the nearest dollar.) 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)? (Round to the nearest dollar.) d. What is the project's NPV given a required rate of return of 14 percent? (Round to the nearest dollar.) Should this machine be purchased? (Select the best choice below.) O A. Yes. The project's NPV is positive. OB. No. The project's NPV is negative.

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate=Required Return =14%=0.14
		N=Year of cash flow
	a	Initial Outlay
	A	Purchase Price	$180,000
	B	Installation cost	$8,000
	B	Investment in Net working Capital	$6,000
	C=A+B	Initial Outlay Associated with the project	$194,000
	b
		Cash Flow in Year 1-9
	D	Annual Depreciation=(180000+8000)/10	$18,800
	E=D*33%	Annual Depreciation Tax Shield	$6,204
	F	Annual Before tax savings	$38,000
	G=F*(1-0.33)	Annual after tax saving	$25,460
	I=E+G	After Tax Cash Flow	$31,664
	c	Terminal Cash Flow in Year10:							$0
	J	Annual after tax cash flow	$31,664
	K	Release of net working capital	$6,000
	L=J+K	Terminal Cash Flow in Year10	$37,664
	N	Year	0	1	2	3	4	5	6	7	8	9	10
	CF	Net Cash Flow	-$194,000	$31,664	$31,664	$31,664	$31,664	$31,664	$31,664	$31,664	$31,664	$31,664	$37,664	SUM
	PV=CF/(1.14^N)	Present Valure	-$194,000	$27,775	$24,364	$21,372	$18,748	$16,445	$14,426	$12,654	$11,100	$9,737	$10,160	-$27,218
	NPV=Sum of PV	Net Present Value	-$27,218
	d	Project NPV	-$27,218
		NPV is negative
		This machine should NOT be purchased