Technology Tools is evaluating the purchase of a new type of technology that would cost $1.5 million to purchase, ship, and install. Still, investment in this machine is expected to increase sales revenues by $400,000, and reduce operating expenses before depreciation and taxes by $125,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $14,000 on an after tax basis. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventories of $80,000, which will be partially offset by a $25,000 increase in accounts payable. This machine has an expected life of 10 years, after which the after tax market (salvage) value of the machine will just equal the cost to remove and sell the equipment. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero. The firm has a 40% marginal tax rate, and a cost of capital for this very risk project is 22.0% for this type of investment.
a. What is the initial cost 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 (i.e., what is the annual after-tax cash flow in Year 10 plus any additional cash flows associated with termination of the project)?