Question

(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 $ 100,000 per year. To operate this machine​ properly, workers would have to go through a brief training session that would cost $ $26,000 after tax. In​ addition, it would cost ​$ 6,000 after tax to install this machine correctly. ​ Also, because this machine is extremely​ efficient, its purchase would necessitate an increase in inventory of ​$ 24,000. This machine has an expected life of 10 ​years, after which it will have no salvage value. Assume simplified​ straight-line depreciation, that this machine is being depreciated down to​ zero, a 30 percent marginal tax​ rate, and a required rate of return of 12 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

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.