Question

Raymobile Motors is considering the purchase of a new production machine for $600,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $100,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $30,000 after taxes. It would cost $8,000 to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value. 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 19 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