(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 $70,000per year. The machine has a purchase price of $250,000,and it would cost an additional $10,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $15,000. This machine has an expected life of 10years, 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 34 percent marginal tax rate, and a required rate of return of 15 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)?
(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 $70,000per year. The machine has a purchase price of $250,000,and it would cost an additional $10,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $15,000. This machine has an expected life of 10years, 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 34 percent marginal tax rate, and a required rate of return of 15 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)?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1fM
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(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 $70,000per year. The machine has a purchase price of $250,000,and it would cost an additional
$10,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $15,000.
This machine has an expected life of 10years, 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
34 percent marginal tax rate, and a required rate of return of
15 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)?
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