Explain recommendation for a project based on npv

Reference no: EM1312904

Explain Recommendation for a project based on NPV

Interco Machinery, Inc. is evaluating the acquisition of a new production machine. This machine will cost $200,000, delivered, and will result in an annual increase in earnings before interest and tax of $50,000. This machine has an expected life of 10 years with no salvage value. Depreciation is assumed to be straight-line 10 years. To be operated properly this machine will require an after tax expenditure of $5,000 to install and another $5,000 after tax for an operator training session. Due to its efficiency, this machine will also require an increase of $20,000 in inventory. Company projects of this risk class require a rate of return of 10%. The company's marginal tax rate is 34%, and this expenditure will require the borrowing of $100,000 from the bank at a 7% interest rate - resulting in additional interest payments of $7,000 per year.

1. What is the project's initial outlay?

2. What is the project's annual after tax cash flows for years 1-9?

3. What is the project's terminal cash flow in Year 10 (terminal + regular)?

4. What is the project's NPV?

5. Should the project be accepted? Why/ Why Not?

Reference no: EM1312904

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