# Question

Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $25,000 after tax. In addition, it would cost $5,000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $30,000. This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified straight-line depreciation, that this machine is being 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 termination of the project)?

d. Should this machine be purchased?

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 termination of the project)?

d. Should this machine be purchased?

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