Reference no: EM132991168

Question - Garcia's Truckin'Pty Ltd is considering the purchase of a new production machine for $200000. The purchase of this machine will result in an increase in earnings before interest and tax of $50000 per year.

To operate this machine properly, workers would have to go through a brief training session that would cost $5000 after tax. In addition, it would cost $5000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20000. This machine has an expected fife 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% interest from its bank, resulting in additional interest payments of $8000 per year. Assume the following: simplified straight-fine depreciation to a book value of zero, a 30% tax rate and a required rate of return of 10%.

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 1to 9?

(c) What is the terminal cash flow in year 10 (i.e. what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?

(d) Should this machine be purchased?