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(Calculating project cash flows and NPV)The Guo Chemical Corporation is considering the purchase of a...

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Finance

(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

$85,000 per year. The machine has a purchase price of

$200,000, and it would cost an additional $5,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by

$18,000.

This machine has an expected life of 10 years, 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

35

percent marginal tax rate, and a required rate of return of

13

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)?

d.Should this machine be purchased?

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