Pural Co. is considering the purchase of a new machine for $900,000 and the installation cost would be $100,000. For the coming 5 years, sales will be $840,000 per year and annual operating costs (exclusive of depreciation) will be $500,000. The purchase of this machine would necessitate an increase in inventory of $100,000. This machine has an expected life of 5 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 25%. (1) What is the initial outlay associated with this project? (2) What are the annual after-tax cash flows associated with this project for years 1 to 5? (3) Should this machine be purchased?

Answer rating: 100% (QA)

To determine whether the machine should be purchased we need to calculate the initial outlay and the annual aftertax cash flows for years 1 to 5 Lets calculate each of these 1 Initial Outlay The initi... View the full answer