Guo Chemical Corporation is thinking the purchase of the chemical analysis machine. Purchase of this machine will result in the increase in earnings before interest and taxes of $70,000 per year. Machine has purchase price of $250,000, and it would cost the extra $10,000 after tax to install this machine properly. Additionally, to operate this machine properly, inventory should be increased by $15,000. This machine has expected life of 10 years, after which it will have no salvage value. Also, suppose simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34% marginal tax rate, and required rate of return of 15 percent.
a. Determine initial outlay related with this project?
b. Write down the annual after-tax cash flows related with this project, for years 1 through 9?
c. Determine the terminal cash flow in year 10 (Determine the annual after-tax cash flow in year 10 plus any extra cash flow related with termination of project)?
d. Should this machine be bought?