Question

(Calculating project cash flows and​ NPV)  Raymobile Motors is considering the purchase of a new production machine for

$350,000.The purchase of this machine will result in an increase in earnings before interest and taxes of $ 200,000

per year. To operate this machine​ properly, workers would have to go through a brief training session that would cost $22,000

after tax. In​ addition, it would cost ​$4,500 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. Assume simplified​ straight-line depreciation, that this machine is being depreciated down to​ zero, a 33 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 flows associated with termination of the​ project)?

d.  Should this machine be​ purchased?

Answer 1