Question

(Calculating project cash flows and NPV) 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 $ 33000 per year, it has a purchase price of $115 000, and it would cost an additional $6 000 after tax to correctly install this machine. In addition, to properly operate this machine, inventory must be increased by $5 500. This machine has an expected life of 10 years, after which it will have no salvage value. Also, assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 32 percent marginal tax rate, and a required rate of return of 7 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 flows associated with the termination of the project)?

d. Should this machine be purchased?

Answer #1

a) Initial Outlay = Investment + NWC = 115,000 + 6,000 + 5,500 = 126,500

b) After-tax cash flow = EBIT x (1 - tax) + Depreciation = 33,000 x (1 - 32%) + 121,000 / 10 = 34,540

c) In year 10, working capital will be recovered, cash flow = 34,540 + 5,500 = 40,040

d) Rate of return of the project can be calculated using I/Y function on a calculator

N = 10, PV = -126,500, PMT = 34,540, FV = 5,500 => Compute I/Y = 24.33% is the IRR of the project

As IRR > 7%, the machine should be purchased.

(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 $90,000 per year. The
machine has a purchase price of $400,000,and it would cost an
additional $7,000 after tax to install this machine correctly. In
addition, to operate this machine properly, inventory must be
increased by $12,000.This machine has an expected life of 10...

(Calculating project cash flows and NPV) Raymobile Motors is
considering the purchase of a new production machine for $550,000.
The purchase of this machine will result in an increase in earnings
before interest and taxes of $180,000 per year. To operate this
machine properly, workers would have to go through a brief
training session that would cost $23,000 after tax. In addition,
it would cost $6,000 after tax to install this machine correctly.
Also, because this machine is extremely...

(Calculating project cash flows and?
NPV)???Garcia's Truckin', Inc. is considering the purchase
of a new production machine for $200,000.The purchase of this
machine will result in an increase in earnings before interest and
taxes of $50,000 per year. To operate this machine? properly,
workers would have to go through a brief training session that
would cost$5,000
after tax. In? addition, it would cost 5,000 after tax to
install this machine correctly. ? Also, because this machine is
extremely? efficient, its...

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....

(Calculating project cash flows and NPV) You are considering
expanding your product line that currently consists of skateboards
to include gas-powered skateboards, and you feel you can sell 8
comma 000 of these per year for 10 years (after which time this
project is expected to shut down with solar-powered skateboards
taking over). The gas skateboards would sell for $110 each with
variable costs of $50 for each one produced, and annual fixed
costs associated with production would be $200,000....

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...

You are a project manager. You are estimating the cash flows of
a potential project that requires an investment of $200,000,
including installation cost, and $30,000 in working capital, which
will be fully recaptured at the end of the project. The machine has
an estimated life of six years and will be depreciated via the
simplified straight-line method. The project is expected to raise
the firm’s annual revenues by $330,000 and increase annual costs by
$125,000. The machine you purchase...

You are a project manager. You are estimating the cash flows of
a potential project that requires an investment of $200,000,
including installation cost, and $30,000 in working capital, which
will be fully recaptured at the end of the project. The machine has
an estimated life of six years and will be depreciated via the
simplified straight-line method. The project is expected to raise
the firm’s annual revenues by $330,000 and increase annual costs by
$125,000. The machine you purchase...

At present, Solartech Skateboards is considering expanding its
product line to include gas-powered skateboards; however, it is
questionable how well they will be received by skateboarders.
Although you feel there is a 60 percent chance you will sell 10000
of these per year for 10 years (after which time this project is
expected to shut down because solar-powered skateboards will become
more popular), you also recognize that there is a 20 percent chance
that you will only sell 4000 and...

You are asked to calculate the cash flows associated with the
following proposal to purchase a new machine.
This machine can be purchased for $1,000,000. Assume the machine
will qualify for a 10% investment tax credit. Also assume it has a
10 year economic life.
In each of the 10 years, sales generated by this machine are
estimated to be $ 300,000 a year. Operating expenses are estimated
to be $100,000 a year for each of the 10 years. This...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 12 minutes ago

asked 24 minutes ago

asked 27 minutes ago

asked 30 minutes ago

asked 31 minutes ago

asked 42 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago