1. (18%) BHM Co. is considering the purchase of a new production machine for $700,000 and...

 

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1. (18%) BHM Co. is considering the purchase of a new production machine for $700,000 and the installation cost would be $100,000. For the coming five years, sales will be $600,000 per year and annual operating costs (exclusive of depreciation) will be $340,000. The purchase of this machine would necessitate an increase in inventory of $50,000. This machine has an expected life of five years, after which it will have no salvage value. Assume that straight-line depreciation is used. The firm's cost of capital is 10% and the firm's tax rate is 20%. 1) What is the initial outlay associated with this project? (4%) 2) What are the annual after-tax cash flows associated with this project for years 1 to 5? (10%) 3) Should this machine be purchased? (6%) PVIF 10%,5 =0.621, PVIFA10 %,5 = 3.791 1. (18%) BHM Co. is considering the purchase of a new production machine for $700,000 and the installation cost would be $100,000. For the coming five years, sales will be $600,000 per year and annual operating costs (exclusive of depreciation) will be $340,000. The purchase of this machine would necessitate an increase in inventory of $50,000. This machine has an expected life of five years, after which it will have no salvage value. Assume that straight-line depreciation is used. The firm's cost of capital is 10% and the firm's tax rate is 20%. 1) What is the initial outlay associated with this project? (4%) 2) What are the annual after-tax cash flows associated with this project for years 1 to 5? (10%) 3) Should this machine be purchased? (6%) PVIF 10%,5 =0.621, PVIFA10 %,5 = 3.791

Answer rating: 100% (QA)

1 Initial cash outlay Purchase price Investment in inventor... View the full answer