Chase manufacturing inc. is considering the purchase of a new super computer for $120,000. the purchase of this compurter will result in an increase in earnings before interest and taxes of $25,000 per year. To the computer properly, workers would have to go through a brief training session that would cost $1,200 after taxes. It would cost $2,000 to install the computer properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory of $10,000. This computer has a useful life of 5 years after which it will have no salvage value. Finally to purchase the new computer, it appears that the firm would have to borrow $50,000 at 7% interest from its local bank, resulting in additional interest payments of $3,500 per year. Assume simplified straight line depreciation and that the machie is being depreciated down to zero, a 34% marginal tax rate, and a required rate of return of 10 percent.
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 1-4?
C. What is the terminal cash flow in year 5 (what is the annual after-tax cash flow in year 5 plus any additional cash flows associated with the termination of the project)?
D. Should the machine be purchased?