I am considering the purchase of a new production machine for
$500,000.  The purcahse of this machine will result in an increase in
earnings befreo 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 machime properly.  Also,
because 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.

A) what is the initial outlay asscoiated with this project?
B) what are the annual after tax cash flows assoaciated with this
project, for years 1 through 9?
C) 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 this project?)
D)Should this machine be purchased?

Please show your work.

---

Request for Question Clarification by omnivorous-ga on 03 Feb 2003 13:36 PST

K9Queen --

This format is tough for showing math and financial calculations.  Do
you have the ability to read an Excel spreadsheet that we'd post for
you to download?

Best regards,

Omnivorous-GA

K9Queen --

I've placed a spreadsheet with year-by-year calculations and totals
here.  Your browser should display this even if you don't have
Microsoft Excel:
http://www.mooneyevents.com/Finance2.xls

A.  The initial outlay is all in after-tax dollars and totals $530,000
for the equipment, training and installation.
B.  The annual after-tax cash flows are the sum of lines 14 and 18:
$116,000.
C.  The year 10 after-tax cash flow matches that of the other years,
$116,000.  There is no difference in the final year because no
additional costs are assumed to remove it from production; there is no
salvage value.
D.  Having a positive NPV of over $52,000, the machinery should be
purchased.

Best regards,

Omnivorous-GA

The spread sheet was great! It Really helped me, and the response time
was very, very fast! You are the best!