Compute project initial,NPV and cash flow
Interco Machinery, Inc. is evaluating the acquistion of a new production machine.This machine will cost $200,000, delivered, and will result in an annual increase in earnings before interest and tax of $50,000.This machine has a expected life of 10 years with no salvage value.Depreciation is assumed to be straight-line 10 years.To be operated properly this machine will require an after tax expenditure of $5,000 to install and another $5,000 after tax for an operator training session.Due to it efficiency, this machine will also require an increase of $20,000 in inventory.Company projects of this rish class require a rate of return of 10%.The companys marginal tax rate is 34%, and the expenditure will require the borrowing of $100,000 from the bank at 8% interest rate - resulting in additional interest payments of $8,000 per year.
1. What is the projects initial outlay?
2. What are the projects annual after tax cash flows for years 1-9?
3. What is the projects terminal cash flow in year 10 (terminal + regular)?
4. What is the projects NPV?
5. Should the project be accepted? Why or Why Not?