QRW Corp. needs to replace an old machine with a new, more efficient model. The new machine being considered will result in an increase in earnings before interest and taxes of $70,000 per year. The purchase price is $200,000, and it would cost an additional $10,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $10,000. This machine has an expected life of 10 years, with no salvage value. Assume that a straight-line depreciation method being used and that this machine is being depreciated down to zero, the marginal tax rate is 34%, and a required rate of return of 15%. (i) Solve for the value of the initial outlay associated with this project. (ii) Solve for the value of annual after-tax cash flows for this project from years 1 through 9.
QRW Corp. needs to replace an old machine with a new, more efficient model. The new machine being considered will result in an increase in earnings before interest and taxes of $70,000 per year. The purchase price is $200,000, and it would cost an additional $10,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $10,000. This machine has an expected life of 10 years, with no salvage value. Assume that a straight-line
(i) Solve for the value of the initial outlay associated with this project.
(ii) Solve for the value of annual after-tax cash flows for this project from years 1 through 9.
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