Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / (Calculating project cash flows and? NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine
(Calculating project cash flows and? NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $65,000 per year. The machine has a purchase price of $100,000 , and it would cost an additional $8,000 after tax to install this machine correctly. In? addition, to operate this machine? properly, inventory must be increased by $20,000. This machine has an expected life of 10 ?years, after which time it will have no salvage value. ? Also, assume simplified? straight-line depreciation, that this machine is being depreciated down to? zero, a 31 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? ?(that is, the annual? after-tax cash flow in year 10 plus any additional cash flow associated with termination of the? project)?
d. Should this machine be purchased?
1. Initial outlay of the project ?
Machine purchase price : $100000
Add: Installation cost : $ 8000
Add: Increase in working capital : $20000
Total initial outlay : $128000
| Calculation table | |||||||||
| Year | Terminal cash flow (T) |
Annaul Cash flow |
Depreciation (108000/10) (A) |
Profit before tax | Tax @31% | Profir after tax (B) |
After tax cash flow (C = T+A+b) |
PVF @13% | Present value |
| 1 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.89 | 42,655.23 | |
| 2 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.78 | 37,739.03 | |
| 3 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.69 | 33,401.21 | |
| 4 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.61 | 29,545.37 | |
| 5 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.54 | 26,171.51 | |
| 6 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.48 | 23,135.04 | |
| 7 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.43 | 20,484.15 | |
| 8 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.38 | 18,122.45 | |
| 9 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.33 | 16,049.93 | |
| 10 | 65,000.00 | 10,800.00 | 54,200.00 | 16,802.00 | 37,398.00 | 48,198.00 | 0.30 | 14,218.41 | |
| 10 | 20,000.00 | 20,000.00 | 0.30 | 5,900.00 | |||||
| Total | 20,000.00 | 6,50,000.00 | 1,08,000.00 | 5,42,000.00 | 1,68,020.00 | 3,73,980.00 | 5,01,980.00 | 5.72 | 2,67,422.35 |
2. Annual after tax cash flow
48198 ( as shown in table )
3. Terminal cash flow in year 10
Annual after tax cash flow 48198
Add: return of working capital 20000
Total terminal cash flow 68198
4. Should machine be purchased
For we require NPV,
Present value of future cash flow $ 267422.35
(As shown in table)
Less: Initial outlay $ 128000
Net present value $ 139422.35
Since , NPV is positive the project should be accepted .
