Question

Weir Inc. is considering to purchase of new production machine for $100,000. although the purchase of this machine will not produce ny increase in sales revenues , it will result in a reduction of labor costs by $31,000 per year. the shipping cost is is $7,000. in addition it would cost $3,000 to install this machine properly. also because this machine is extremely efficient its purchase would necessitate an increase in inventory of $25,000. this machine has an expected life of ten years, after which it will not have no salvage value. finally to purchase the new machine it appears that the firm would have to borrow $60,000 per year. assume simplified straight line depreciation and that this machine is being depreciated down to zero , a 30% marginal tax rate , and a required rate of return of 12%.

a) what are the annual after tax cash flows associated with this project , for years 1 to 9 ?

b) what are the terminal cash flows in year 10 ?

Answer 1

Answer to A and B

Particulars	0	1	2	3	4	5	6	7	8	9	10
Machine	-100000
Installation	-3000
Inventory	-25000
Reduction in Labor		31000	31000	31000	31000	31000	31000	31000	31000	31000	31000
Reduction in shipping cost		7000	7000	7000	7000	7000	7000	7000	7000	7000	7000
Less: Interest		7200	7200	7200	7200	7200	7200	7200	7200	7200	7200
Less: Dep (103000/10)		10300	10300	10300	10300	10300	10300	10300	10300	10300	10300
EBT		20500	20500	20500	20500	20500	20500	20500	20500	20500	20500
Less: Tax at 30%		6150	6150	6150	6150	6150	6150	6150	6150	6150	6150
EAT		14350	14350	14350	14350	14350	14350	14350	14350	14350	14350
Ad: Depreciation		10300	10300	10300	10300	10300	10300	10300	10300	10300	10300
Add: Working Cap Realise											25000
Cash Flow		24650	24650	24650	24650	24650	24650	24650	24650	24650	49650