Hyundai Motor Company is considering the purchase of a new chassis fabrication machine for ($1,400,000). The purchase
Question:
Hyundai Motor Company is considering the purchase of a new chassis fabrication machine for \($1,400,000\). The purchase of this machine will result in an increase in earnings before interest and taxes of \($250,000\) per year. To operate this machine properly, workers will have to go through a brief training session that would cost \($28,000\) after taxes. It would cost \($8,000\) to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory of \($35,000.\) This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 21 percent marginal tax rate, and a required rate of return of 13 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 the termination of the project)?
d. Should the machine be purchased?
Step by Step Answer:
Foundations Of Finance
ISBN: 9781292318738
10th Global Edition
Authors: Arthur Keown, John Martin, J. Petty