The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of...

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 $65,000 per year. The machine has a purchase price of $350,000 and it would cost an additional $9,000 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,32 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 99?

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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jeff jeffy answered 10 months ago

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