Garcia\'s Truckin\' Inc is considering the purchase of a new production machine
ID: 2488382 • Letter: G
Question
Garcia's Truckin' Inc is considering the purchase of a new production machine for $300,000 The purchase of this machine will result in an increase in earnings before interest and taxes of $80,000 per year To operate the machine properly workers would have to go through a brief training session that would cost $3,000 after taxes It would cost $5,000 to install the machine properly 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 Finally to purchase the new machine, k appears that the firm would have to borrow $100,000 at S percent interest from its local bank resulting in additional interest payments of $8,000 per year Assume simplified straight line depreciation and that the machine is being depreciated down to zero, a 31 percent marginal tax rate, and a required rate of return of 14 percent What is the initial outlay associated with this protect? What are the annual after-tax cash flows associated with tins project for years 1 through 9? What is the terminal cash flow m year 10 (what is the air.ua! after tax cash flow a year 10 phas any additional cash flows associated with the Should the machine be purchased? What is the initial outlay associated with this project?Explanation / Answer
cost of machine 300000 training expenses 3000 installation charges 5000 inventory 20000 initial outlay associated with the products 328000 year EBIT interest earning after interest tax 31% annual after tax flow depreciation earning after tax before depreciation 1 80000 8000 72000 22320 49680 30000 79680 0.877193 69894.74 2 80000 8000 72000 22320 49680 30000 79680 0.626566 49924.81 3 80000 8000 72000 22320 49680 30000 79680 0.447547 35660.58 4 80000 8000 72000 22320 49680 30000 79680 0.319677 25471.84 5 80000 8000 72000 22320 49680 30000 79680 0.228341 18194.17 6 80000 8000 72000 22320 49680 30000 79680 0.1631 12995.84 7 80000 8000 72000 22320 49680 30000 79680 0.1165 9282.742 8 80000 8000 72000 22320 49680 30000 79680 0.083214 6630.53 9 80000 8000 72000 22320 49680 30000 79680 0.059439 4736.093 10 80000 8000 72000 22320 49680 30000 79680 0.042456 3382.923 terminal cash flow at 10th year 4232.051 20000 0.042456 849.1273 present value of cash flow 237023.4 cash outflow 328000 Net worth -90976.6 terminal cash flow from 1 to 9 year after tax 49680
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