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(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?
Expert Solution
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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 flowDepreciation
(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 .
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