b) Magen's Bakery, Inc., is considering the purchase of a new cake mixing equipment for $200,000. This would result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine efficiently, worker's training session would cost $10,000 after taxes. It would cost another $10,000, after taxes, to get equipment to be ready for use. Acquiring this project would cause changes in the working capital. The accountant has provided the following figures for the calculation of the working capital: Without the project $25 000 $35 000 $50 000 With the project $55 000 Accounts receivables Inventory Accounts payables $70 000 $65 000 This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $80,000 at 10 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume the use of the simplified straight-line method to depreciate this machine down to zero, a 34 percent marginal tax rate, and a required rate of return of 12 percent. What is the initial cash outlay associated with this project? i) What are the annual net cash flows associated with this project for Years 1 through 9? ii) What is the terminal cash flow in Year 10?
b) Magen's Bakery, Inc., is considering the purchase of a new cake mixing equipment for $200,000. This would result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine efficiently, worker's training session would cost $10,000 after taxes. It would cost another $10,000, after taxes, to get equipment to be ready for use. Acquiring this project would cause changes in the working capital. The accountant has provided the following figures for the calculation of the working capital: Without the project $25 000 $35 000 $50 000 With the project $55 000 Accounts receivables Inventory Accounts payables $70 000 $65 000 This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $80,000 at 10 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume the use of the simplified straight-line method to depreciate this machine down to zero, a 34 percent marginal tax rate, and a required rate of return of 12 percent. What is the initial cash outlay associated with this project? i) What are the annual net cash flows associated with this project for Years 1 through 9? ii) What is the terminal cash flow in Year 10?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1bM
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Transcribed Image Text:b) Magen's Bakery, Inc., is considering the purchase of a new cake mixing equipment for $200,000.
This would result in an increase in earnings before interest and taxes of $50,000 per year. To operate
the machine efficiently, worker's training session would cost $10,000 after taxes. It would cost
another $10,000, after taxes, to get equipment to be ready for use. Acquiring this project would
cause changes in the working capital. The accountant has provided the following figures for the
calculation of the working capital:
Accounts receivables
Inventory
Accounts payables
Without the project
$25 000
$35 000
$50 000
With the project
$55 000
$70 000
$65 000
This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to
purchase the new machine, it appears that the firm would have to borrow $80,000 at 10 percent
interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume the
use of the simplified straight-line method to depreciate this machine down to zero, a 34 percent
marginal tax rate, and a required rate of return of 12 percent.
i) What is the initial cash outlay associated with this project?
ii) What are the annual net cash flows associated with this project for Years 1 through 9?
iii) What is the terminal cash flow in Year 10?
iv) Should this machine be purchased?
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