Raymobile Motors is considering the purchase of a new production

Raymobile Motors is considering the purchase of a new production

machine for $500,000. The purchase of this machine will result in an increase in earnings

before interest and taxes of $150,000 per year. To operate this machine properly, workers would

have to go through a brief training session that would cost $25,000 after tax. In addition, it would

cost $5,000 after tax to install this machine properly. Also, because this machine is extremely efficient,

its purchase would necessitate an increase in inventory of $30,000. This machine has an

expected life of 10 years, after which it will have no salvage value. Assume simplified straight-line

depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax

rate, and a required rate of return of 15 percent.

  1. What is the initial outlay associated with this project?
  2. What are the annual after-tax cash flows associated with this project for years I through 9?
  3. What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year

10 plus any additional cash flows associated with termination of the project)?

  1. Should this machine be purchased?
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