Tunub 12-68. (Calculating project cash flows and NPV) Weir's Trucking, Inc., is considerine a purchase of a new production machine for $100,000. The purchase of this t machine would result in an increase in earnings before interest and taxes of s9s c per year. To operate this machine properly, workers would have to go through a hrt training session that would cost $5,000 after taxes. In addition, it would cost $5.00 after taxes to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $25,000. 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. a. What is the initial cash outlay associated with this project? b. What are the annual net cash flows associated with this project for Years 1 throuor c. What is the terminal cash flow in Year 10 (what is the annual free cash flow in Year 10 plus any additional cash flows associated with termination of the project): d. Should this ma
Tunub 12-68. (Calculating project cash flows and NPV) Weir's Trucking, Inc., is considerine a purchase of a new production machine for $100,000. The purchase of this t machine would result in an increase in earnings before interest and taxes of s9s c per year. To operate this machine properly, workers would have to go through a hrt training session that would cost $5,000 after taxes. In addition, it would cost $5.00 after taxes to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $25,000. 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. a. What is the initial cash outlay associated with this project? b. What are the annual net cash flows associated with this project for Years 1 throuor c. What is the terminal cash flow in Year 10 (what is the annual free cash flow in Year 10 plus any additional cash flows associated with termination of the project): d. Should this ma
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:project shouluU
across the
four years to generate an NPV in excess of £100,000?
funds?
12-6s. (Calculating project cash flows and NPV) Weir's Trucking, Inc., is considerio
machine would result in an increase in earnings before interest and taxes of $25.0m
per year. To operate this machine properly, workers would have to go throuch a
training session that would cost $5,000 after taxes. In addition, it would cost $5.00
after taxes to install this machine correctly. Also, because this machine is extremel
efficient, its purchase would necessitate an increase in inventory of $25,000. 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.
a. What is the initial cash outlay associated with this project?
b. What are the annual net cash flows associated with this project for Years 1 throug
c. What is the terminal cash flow in Year 10 (what is the annual free cash flow n lor
10 plus any additional cash flows associated with termination of the project):
d. Should this machine be purchased?
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