Truck Co. 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 $55,000 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 properly. Also, because this machine has an expected life
of 10 years, after which it will have no salvage value. Finally, to purchase the new machine appears that the firm would have to borrow $100,000 at 8% interest at the local bank, resulting in additional interest payments of $8,000 per year. Assume simplified straight- line depreciation and that this machine is being depreciated down to zero, a 34% marginal tax rate, and a required rate of return of 10%.
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?
Add back Dep Exp
c. What is the terminal cash flow in year 10?
d. What is the NPV, PI, and IRR?
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