Part 1 Garcia\'s Truckin Inc. is considering the purchase of a new production ma
ID: 2756937 • Letter: P
Question
Part 1 Garcia's Truckin Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine properly, workers would have to go through a brief training session that would cost $5,000 after taxes. It would cost $5,000 to install the machine properly. Also, because this machine is extremely efficient, it's purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume simplified straight-line depreciation and that the machine is being depreciated down to zero, a 34 percent 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 through 9?(cash flow from 1 to 9 are equal) 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 the termination of the project)? Should the machine be purchased? Part 2 Mutually exclusive projects. Nanotech currently has a production electronics facility and it is cost prohibitive to expand this production facility. Nanotech is deciding between the following four contracts. Which one should they accept? A $120 million at 100% production use B $110 million at 90% production use C $60 million at 60% production use D $50 million at 40% production use A? B? B and D? C and D? B and C? Part 3 Calculating free cash flows. Racin Scooters is introducing a new product. The expected change in EBIT is $475,000. They have a 34 percent marginal tax rate. There will be $100,000 of depreciation per year. And the following changes: Accounts receivable $45,000/no project $63,000/with project Inventory $65,000/no project $80,000/with project Accounts payable $70,000/no project $94,000/with project What is the project's free cash flow in year 1?
Explanation / Answer
PART1:a. Initial Outlay associated with the project isin year1 through 9:
b. Annual after tax cash flows associated with this project:
c. Terminal Cash flow in year 10
d. NPV of the Machine:
The machine should be purchased due to positive NPV of $32442
PART 2:Mutually exclusive projects. Nanotech currently has a production electronics facility and it is cost prohibitive to expand this production facility. Nanotech is deciding between the following four contracts. Which one should they accept?
ans:C $60 million at 60% production use.
PART 3:
projects free cash flow in year1 is 356500
information amount in $ Purchase Cost of the machine 200000 ( -Borrowing) -100000 + Initial Training 5000 + Installation Cost 5000 Cost of the machine 110000 + Increase in Working Capital 20000 Total Initial Cash Outlay 130000