(Calculating project cash flows and NPV) Garcia\'s Truckin, Inc, is considering
ID: 2787228 • Letter: #
Question
(Calculating project cash flows and NPV) Garcia's Truckin, Inc, is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of S50,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5,000 after tax. In addition, it would cost $5,000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of S20,000. This machine has an expected life of 10 years, after which it will have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest from its local bank, resulting in additional interest payments of S8,000 per year. Assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 34 percent tax rate, and a required rate of retum of 10 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 flows associated with termination of the project)? d. Should this machine be purchased? The initial cash outlay associated with this project is $D Round to the nearest dollar.) aExplanation / Answer
Garcia's Truckin Inc. a) What is the initial outlay associated with this project? Invest 200,000 + 5,000 + 20,000 = 225,000 + 5,000 = 230,000 b) What are the annual after-tax cash flows associated with this project for years 1 through 9? Annual tax savings on depreciation: Basis 205,000 / 10 = 20,500 x 34% = 6,970 Annual cash flow: 50,000 less 34% tax = 33,000 Total 39,970 c) What is the terminal cash flow in year 10 Total as b) 39,970 + 20,000 = 59,970 d) Should the machine be purchased? Invest (230,000) PV Annuity of 39,970, N 9, R 10% = 230,187.23 PV 59,970, N 10, R 15% = 25,433.28 NPV 25,620.51 Positive - a good purchase
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.