Reference no: EM132459742
Problem: 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 ?$5,000 after taxes. It would cost ?$4,000 to install the machine properly.? Also, because this machine is extremely? efficient, its purchase would necessitate an increase in inventory of ?$15,000. This machine has an expected life of 10 ?years, after which it will have no salvage value.? Finally, to purchase the new? machine, it appears that the firm would have to borrow? $100,000 at 8 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 35 percent marginal tax? rate, and a required rate of return of 11 percent.
Required:
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?
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