Business

FinanceQ&A Library(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 $70,000per year. The machine has a purchase price of $250,000,and it would cost an additional$10,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $15,000.This machine has an expected life of 10years, after which time it will have no salvage value. Also, assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a34 percent marginal tax rate, and a required rate of return of15 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)?Question

Asked Nov 11, 2019

75 views

(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 $70,000per year. The machine has a purchase price of $250,000,and it would cost an additional

$10,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $15,000.

This machine has an expected life of 10years, 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
34 percent marginal tax rate, and a required rate of return of

15 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)?

Step 1

Calculate the initial cost, annual after-tax cash flows, and terminal cash flow in year 10 as follows:

Step 2

Workings...

Tagged in

Find answers to questions asked by student like you

Show more Q&A

Q: For technical analysis, based on patterns of historical prices, to have value, ______ form of market...

A: Weak form efficiency market hypothesis is an element of efficient market hypothesis which states tha...

Q: 7. Factors that impact the yield curve Aa Aa There are three factors that can affect the shape of th...

A: Answer 1:“Upward-sloping yield curve”Justification: Since the real risk-free rate and the inflation ...

Q: Compute the expected return given these three economic states, their likelihoods, and the potential ...

A: Calculation of Expected Return:The expected return is 1.20%.Excel Spreadsheet:

Q: A metallurgical engineer decides to set aside money for his newborn daughter's college education. He...

A: Let’s assume the engineer deposits X for one year for 14 years:

Q: A 4.40 percent coupon municipal bond has 16 years left to maturity and has a price quote of 105.50. ...

A: “Hi, as per our policy we will answer the first three parts of the question. Kindly repost the remai...

Q: Compute Bowling Avenue Inc.'s required rate of return given a beta of.9, risk free rate of 3.25%, an...

A: Calculation of required rate of return:Answer:The required rate of return is 8.425%

Q: Company has expected earnings of $4.8 per share for next year. The firm's ROE is 16%, and its earnin...

A: Present value of growth opportunities (PVGO) can be calculated as below:

Q: You decide to discount a$5250, 345-day note at 3% to your bank at a discount rate of 4.5% on day 210...

A: Calculation of Proceeds:Assuming there are 360 days in a year.The proceeds are $5,309.80.Excel Sprea...

Q: Suppose that 10 years ago you bought a home for $150,000, paying 10% as a down payment, and financin...

A: Calculation of Amount Saved each month due to lower Monthly Payment:The amount saved each month due ...