Question

The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 after tax to correctly install this machine. In addition, to properly operate this machine, inventory must be increased by $5,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also, 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?



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  • CreatedOctober 31, 2014
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