The Chung Chemical Corporation is considering the purchase of a chemical analysis
The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 to properly install this machine. In addition, to properly operate this machine, inventory must be increased by $5,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also, 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.
Illustrate your cash flow calculations using Microsoft Excel, and answer the following questions:
- What is the initial outlay associated with this project?
- What are the annual after-tax cash flows associated with this project for years 1
- 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?
- Should this machine be purchased?