Question

​(New project analysis​) Garcia's Truckin' Inc. is considering the purchase of a new production machine for ​$250,000.The purchase of this machine will result in an increase in earnings before interest and taxes of ​$60,000 per year. To operate the machine​ properly, workers would have to go through a brief training session that would cost ​$3,000 after taxes. It would cost ​$6,000 to install the machine properly.​ Also, because this machine is extremely​efficient, its purchase would necessitate an increase in inventory of ​$15,000.This machine has an expected life of 10 ​years, after which it will have no salvage value.​ Finally, to purchase the new​ machine, it appears that the firm would have to borrow​ $100,000 at 10 percent interest from its local​ bank, resulting in additional interest payments of ​$10,000 per year. Assume simplified​ straight-line depreciation and that the machine is being depreciated down to​ zero, a 35 percent marginal tax​ rate, and a required rate of return of 13 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 the machine be​ purchased?

Answer 1

otay assocated o?t pvosec a) Int Hal CASSet vantCost Ien-tory 300O So0 InstallaHon Cost 09 Totul nal Cash 234 000 floLos

floues from yeav toyear annulCash CB tax Atler Earnings hefore 1teest and Eo co tcco .0e0) 50 Intercst Bovouoings Strcoo tax Eaxn ns Bctore Dpteres lass 39 tax BRs00 Earnings ter tar 25600 add Dep r CRationn p annual Cah Houos 0918 $1X04 MItu EN 9 19 lash (C) flouos Year lo annual CalFloo s Atter $58 100 tax $15000 add Realt srtionY O Inventory (teriral Car tota Peal 73 lo0 total

Net present vuloe gprot eet Cdy 13/ Present valo e o Cash tlouos Cask flocospresentvaloe eav annety Factor 274000 24000 S.1316 $ 298145.96 Ayekl t to 9 S8 lbo $2153 5.26 tb $3100 2946 Pre Semt valoe Cush tlouos machine Stnce the NPV Poseue than machine be porchaged preTeet Aca