Question

In: Finance

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

The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $5,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also, assume that there is simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax rate, and a required rate of return of 15 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 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the project)?

d). Should this machine be purchased?

Solutions

Expert Solution


Related Solutions

5. ​The Cable Chemical Corporation is considering the purchase of a chemical analysis machine. Although the...
5. ​The Cable Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in revenue of $150,000 and cash expenses of $65,000 per year, it has a purchase price of $450,000, and it would cost an additional $50,000 to correctly install this machine. In addition, to properly operate this machine, inventory must be increased by $30,000. This machine has an expected life of 10 years, after which it can...
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...
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 $75,000 per year. The machine has a purchase price of ​$300,000​, 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 ​$12,000. This machine has an expected life of 10 ​years, after which time...
(Calculating project cash flows and​ NPV)  The Chung Chemical Corporation is considering the purchase of a...
(Calculating project cash flows and​ NPV)  The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $ 34 comma 000$34,000 per​ year, it has a purchase price of ​$85 comma 00085,000​, and it would cost an additional ​$8 comma 0008,000 after tax to correctly install this machine. In​ addition, to properly operate this​ machine, inventory must be increased by ​$3...
Weir Inc. is considering to purchase of new production machine for $100,000. although the purchase of...
Weir Inc. is considering to purchase of new production machine for $100,000. although the purchase of this machine will not produce ny increase in sales revenues , it will result in a reduction of labor costs by $31,000 per year. the shipping cost is is $7,000. in addition it would cost $3,000 to install this machine properly. also because this machine is extremely efficient its purchase would necessitate an increase in inventory of $25,000. this machine has an expected life...
A corporation is considering a proposal for the purchase of a machine that will save $250,000...
A corporation is considering a proposal for the purchase of a machine that will save $250,000 per year before taxes. The cost of operating the machine, including maintenance, is $35,000 per year. The machine will be needed for five years after which it will have a zero salvage value. MACRS depreciation will be used, assuming a three‐year class life. The marginal income‐tax rate is 24%. If the firm wants 15% IRR after taxes, how much can it afford to pay...
Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine....
Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine. The new machine will cost $135,000, has an installation cost of $5000, and will have an expected life of five years with a salvage value of $5,000. The new machine will require $2000 additional working capital. The new machine will result in a cost savings of $20,000 a year. Sales are expected to increase $9,000 per year. The old machine was purchased five years...
Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine....
Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine. The new machine will cost $135,000, has an installation cost of $5000, and will have an expected life of five years with a salvage value of $5,000. The new machine will require $2000 additional working capital. The new machine will result in a cost savings of $20,000 a year. Sales are expected to increase $9,000 per year. The old machine was purchased five years...
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost...
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $228,168 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $33,500. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 5%....
Michener Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost...
Michener Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $170,000 and has an estimated useful life of eight years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $31,000. Management also believes that the new machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 10%. Click...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT