​(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 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 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)?

Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
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​(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 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
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)?
 
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