.(New project analysis) The Chung Chemical Corporation is considering the purcha
ID: 2765993 • Letter: #
Question
.(New project analysis) 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 $5000. This machine has an expected life of 10 years, after which it will have no salvage value. Also assume simplified straight-line 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?
Explanation / Answer
a. What is the initial outlay associated with this project?
Net Cost of the machine = $100,000 + $5000 + $5000
= $110,000
b. What are the annual after-tax cash flows associated with this project for years 1 through 9?
Annual cash flow for year 1 to 9
After tax savings $23100
Depreciation savings$10500
Net cashflows $33600
c. What is the terminal year cash flow?
After tax savings $23100
Depreciation savings$10500
NWC recovery $5000
Total Cashflows $38600
d. Should this machine be purchased?
NPV=Present value of inflows-Present value of outflows
Required rate of return of 15 percent
Present value of out flow=$110000
P.V.of inflows =$169887
NPV =$59887
Here NPV for the project is $59887 so we can accept the project.
Note:1.All the numbers shown in the calculations are in $ only
2.Calculation of P.V of inflows
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.