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El gato motors is considering the purchase of a new production machine for 1 million dollars. the purchase of this machine will result in an increase in earnings before interest and taxes of 400,000per year. it would cost 50,000 after tax to install machine; in addition, to operate this machine properly, workers would have to go through a brief training session that would cost 100,000 after tax. also because this machine is so efficient its purchase would necessitate an increase in inventory of 150,000. this machine has an expected life of 10 years after which time it will have no salvage value. Assume simplified straight line depreciation , this machine is being depreciated down to zero a 34% marginal tax rate and a required rate of 12 %.

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 1-9

c) what is the terminal cash flow in yeaar10?

d) should this machine be purchased?

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Accounting Basics, Accounting

Category:- Accounting Basics
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