Homework: Homework Three Score: 0 of 2 pts P12-19 (similar to) Sa 7 of 10 (0 com
ID: 2821414 • Letter: H
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Homework: Homework Three Score: 0 of 2 pts P12-19 (similar to) Sa 7 of 10 (0 complete) Hw Score: 0%, 0 of 20 Question Help (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 eamings before interest and taxes of $36,000 per year, it has a purchase price of $90.000, and it would cost an additional $8,000 after tax to correctly Install this machine. In addition, to properly operate this machine, inventory must be increased by $4,500. This machine has an expected life of 10 years, after whic it will have no salvage value Also, 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 aro the annual ater-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 aftfer-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)? d. Should this machine be purchased? a. The initial cash outay associated with his proiect is4D (Round to the nearest dollar) Enter your answer in the answer box and then click Check Answer remaining Clear AllExplanation / Answer
a.
b.
c. Terminal cash flow at year 10 = 33,720 + release of working capital i.e. 4,500
Terminal cash flow at year 10 = 33,720 + 4,500 = $38,220
d. NPV of the machine = 33,720 * PVAF(13%,9y) + 38,220 * PVF(13%,10y) -
NPV of the machine = 33,720 * 5.132 + 38,220 * 0.295 - 100500
NPV = 173,039.41 + 11,259.17 - 100,500 = 83,798.58
Since, the Net Present Vlaue of the machine is positive, machine should be purchased
Initial Outlay Amount Machine cost 90000 Installation cost 6000 Inventory required 4500 Total 100500Related Questions
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