(New project analysis) Raymobile Motors is considering the purchase of a new pro
ID: 2634635 • Letter: #
Question
(New project analysis) Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $25,000 after taxes. It would cost $5,000 to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory of $30,000. This machine has an expected life of 10 years, after which it will have no salvage value. Assume 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 the machine be purchased?
Explanation / Answer
a) Invest 500,000 + 5,000 + 30,000 = 535,000 + 25,000 = 560,000
b)
Annual tax savings on depreciation: Basis 505,000 / 10 = 50,500 x 34% = 17,170
Annual cash flow: 150,000 less 34% tax = 99,000
Total 116,170
c)
Total as b) 116,170 + 30,000 = 146,170
d)
Invest (560,000)
PV Annuity of 116,170*PVIFA(15,9) = 554,315
PV 146,170/1.15^10 = 36,131
NPV = 30,446 Positive
hence machine should be purchased
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.