The BoomBoom Chemical Company is considering purchasing a new production machine. The machine has a cost...

The BoomBoom Chemical Company is considering purchasing a new production machine. The machine has a cost of $250,000 and would cost an additional $10,000 after-tax to install. If purchases, the machine will increase earnings before interest and tax by $70,000 per annum. To operate effectively, raw material inventory would need to be increased by $10,000. The machine has an expected life of 10 years and no salvage value. It will be depreciated straight line (prime cost) over its 10 year life. The company has a marginal tax rate of 30 per cent and a cost of capital of 15 per cent.

REQUIRED:

(i) Calculate the initial outlay associated with the project.

(ii) Calculate the annual after-tax net cash flows associated with the project over years 1 -10.

(iii) Calculate the after-tax net cash flow in year 10.

(iv) Calculate the net present value of the project.

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Expert Solution

jeff jeffy answered 1 year ago

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