Question

(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 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. ? Finally, to purchase the new? machine, it appears that the firm would have to borrow ?$100,000 at 8 percent interest from its local? bank, resulting in additional interest payments of $8,000per year. Assume simplified? straight-line depreciation, that this machine is being depreciated down to? zero, a 34 percent tax? rate, and a required rate of return of 10 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 termination of the? project)?

d.??Should this machine be? purchased?

Answer 1